BAM Key Details: 

  • A new Redfin report shows a $40,000 increase in purchasing power for homebuyers on a $3,000 monthly housing budget since mortgage rates peaked last fall. 
  • Redfin economists don’t expect significant gains or drops in mortgage rates in the foreseeable future. Fed rate cuts could come as early as March but are more likely to come in later months. This week’s FOMC meeting should provide some clues. 

A new report from Redfin highlights the increase in purchasing power resulting from the decline in mortgage rates from their peak last October. 

Now that rates have fallen to a weekly average of 6.7%, homebuyers with a $3,000 monthly housing budget can now afford a home priced at $453,000—compared to $416,000 with an average rate of 7.8%. 

That’s almost a $40,000 difference, giving buyers a little more wiggle room when it comes to housing price points. And buyers with a less expensive home in mind are now in a better position to afford the mortgage payment or save a significant amount in monthly housing costs.

Redfin-How-much-home-can-you-afford-as-mortgage-rates-change

Source: Redfin

Shopping at a higher price point vs. saving with a lower mortgage payment

Byron Lazine reviewed Redfin’s report on Monday’s Hot Sheet, acknowledging that homebuyers can now look at homes with higher price tags, but adding a more likely scenario. 

Obviously, you could also say, ‘Hey, I’m going after the same $460,000 purchase price and lower the monthly rate,’ which I think is really good advice for most people in this market.

Byron Lazine

After all, buyers still faced with affordability challenges are more likely to take advantage of lower monthly costs on the same house they were considering when rates were in the high 7s. 

Many of today’s buyers have come to terms with mortgage rates in the 6% range but were less inclined to make a move when rates soared to 8% last fall. 

The purchase price of the typical U.S. home sits at roughly $363,000. With a mortgage rate of 6.7%, buyers would have a monthly payment of about $2,545. The same purchase price, at a rate of 7.8%, resulted in a monthly payment of $2,713—almost $200 more. 

Granted, those figures don’t include insurance, property taxes, or HOA fees. But that $168 difference is a significant monthly savings (depending on how it’s used). 

On the other hand, buyers who haven’t found a home in their former price range can now take advantage of their increase in purchasing power to look at more expensive homes on the market. 

That said, as more buyers can afford to reenter the market, competition will only get hotter as long as inventory remains low. 

Bidding wars are picking up as mortgage rates decline and inventory stays low. I’ve seen a few homes get 15-plus offers recently, and one got more than 30. Late last year, many listings sat on the market as buyers sat on the sidelines, hoping for rates to drop. Now, buyers are snapping up homes because even though rates haven’t plummeted, people are realizing that the longer they wait to buy a home, the more competition they’re likely to face.

Shoshana Godwin

Redfin Premier agent in Seattle

Mortgage rates expected to remain in the 6% range for the foreseeable future

While Redfin economists see mortgage rates ending the year lower than they started it, they don’t expect them to drop below 6% anytime soon. 

Like us, they’ll be paying close attention to this week’s FOMC meeting to pick up any clues on how soon the Fed is likely to cut interest rates—maybe as soon as March but more likely later. 

With that in mind, Redfin chief economist Daryl Fairweather shared her advice for homebuyers. 

My advice to serious house hunters: Trying to time the market around mortgage rates is probably a waste of energy, as affordability is unlikely to change meaningfully in the next several months. Instead, buyers should consider their own personal and financial circumstances: What matters most is whether the home meets your needs long term and whether you can afford it. Timing the market mattered in 2021, when we were in a golden window of record-low rates–but that window is closed.

Daryl Fairweather

Redfin Chief Economist