BAM Key Details:
- As mortgage rates fall from their 2022 peaks and home prices come down from theirs, more sellers are returning to the market to meet increasing buyer demand.
- As rates drop, buyers signing up for a $3,000 mortgage payment can afford homes costing $60,000 more and roughly 84 square feet larger than October 2022.
Winter may not technically be over, but home shopping season is just around the corner.
With the spring market approaching, there’s some promising news for buyers and sellers alike. A new Redfin report shows home buyer demand has reached its highest level since last September, thanks to the impact of declining mortgage rates on purchasing power.
Also, after mortgage rate spikes shaved extra rooms from the typical home’s floor plan in 2022, square footage is now on the rise, along with the median home price that comes with a $3,000 monthly mortgage payment.
While mortgage costs nearly doubled in 2022 compared to before the pandemic, they’ve eased slightly in recent months. According to a new Zillow analysis, home buyer mortgage payments have begun stretching to accommodate larger homes with higher price tags.
Here’s what you need to know.
More sellers are returning to meet increased buyer demand
As more buyers return to the market, sellers, too, are returning in greater numbers to meet their demand. While new listings are down 17% compared to a year ago, that’s the smallest decline in more than four months.
In the four weeks ending February 5, pending home sales posted their smallest annual decline since last September—falling 20% from a year ago. Plus, purchase mortgage applications have increased 3% compared to the previous week.
That said, it’s difficult to know whether demand will continue to rise, given buyers’ uncertainty surrounding the Fed’s latest rate hike and how that will impact mortgage rates.
By Super Bowl weekend, we usually have a good idea how a given year’s housing market will play out. But this year is anything but typical. This year is more uncertain than most because the effects of last year’s rapid rate hikes are still flowing through the economy, and we’re not sure how much more the Fed will raise rates this year. So even after the Super Bowl comes and goes, we’ll be closely monitoring the Fed’s words and actions, along with inflation rates and indicators about the health of the labor market for signals that could affect homebuyer demand.
Last year’s mortgage rates cut $305,000 and 140 square feet
Soaring mortgage rates in 2022 cut $305,000 off the price buyers could afford with a $3,000 monthly mortgage payment.
The home price corresponding to a $3,000-a-month mortgage payment dropped from $865,000 at the beginning of 2022 to a low of $560,000 in October, significantly impacting the size of homes available.
It also shaved an average of 140 square feet from the floor plan of the typical home at that price point, forcing buyers to sacrifice extra bedrooms and office spaces.
Mortgage rates have a huge impact on the types of homes buyers are able to afford. Rates that doubled over the past year carved an extra bedroom or office space off of homes at the national level, though the sting has lessened in recent weeks. Buyers in more affordable hot markets are still getting solid bang for their buck, despite losing a lot of purchasing power.
As rates have recently fallen from their peak last year of just over 7%, buyers are now able to afford larger homes with higher price tags for the same monthly payment.
As of February 9th of 2023, the typical home sale price associated with a $3,000 monthly housing cost is up $60,000 compared to last October. And the typical $3,000 a month floorplan has recovered 84 square feet.
Source: Zillow
More house for the money in Memphis and the Midwest
Buyers can still get the largest home for their dollar in Memphis and the Midwest, despite annual declines driven by last year’s soaring mortgage rates.
Relatively affordable markets in the Midwest and Great Lakes regions saw the steepest declines in purchasing power last year. But in 2023, they still offer some of the biggest homes for the money.
Hartford, CT, on the other hand, saw the biggest drop last year in the size of home a $3,000 a month payment can buy, losing 1,200 square feet. Buyers in Indianapolis and Cleveland also lost more than 1,000 square feet.
That said, Cleveland, along with Kansas City, is among the top 10 metros for home size at the $3,000-a-month price point. Both metros rank among Zillow’s 10 hottest markets for 2023.
Homes in less expensive markets typically come with a larger footprint to begin with, meaning they had farther to fall when mortgage rates put additional strain on home buyers’ wallets.
Source: Zillow
As housing costs rose in 2022, hot, affordable markets saw more buyer competition than their pricier counterparts.
Buyers in more expensive markets had less square footage to lose, but their floor plans have been shrinking, too.
In San Jose, $3,000 a month will buy a 1,052-square-foot home—down from last year’s 1,268 square feet. Homes at the same price point in Los Angeles, San Diego, and San Francisco each come with less than 1,400 square feet.
Since hitting bottom last October, home size for a $3,000 monthly payment has seen the biggest increases in these four markets:
- Salt Lake City, UT: +365 square feet
- Minneapolis, MN: +357
- Memphis, TN: +346
- Denver, CO: +340
Redfin’s Homebuyer Demand Index at its highest level since September
While increases in the value and square footage of affordable homes may not be the primary reason buyers are returning to the market, they certainly can’t hurt.
And, generally speaking, the more a buyer can afford with the same monthly mortgage payment, the more options they have to choose from.
Redfin’s Homebuyer Demand Index tracks and measures requests for home tours and other services provided by Redfin agents. As of February 5, 2023, the index has reached its highest level since last September.
That index relies on the following metrics for home buying activity:
- Mortgage-purchase applications—which, while down 37% compared to a year ago, saw a weekly seasonally-adjusted increase of 3% during the week ending February 3.
- “Homes for sale” searches on Google, while down 23% compared to a year ago, went up roughly 38% from their low in November during the week ending February 4.
- The average 30-year fixed mortgage rate was 6.12% for the week ending February 9th, up slightly from the previous week’s 6.09% but down from last year’s peak of 7.08% in November. The daily average on February 9th was 6.32%, up from last week’s 5.99%.
The seasonally-adjusted Homebuyer Demand Index was up 21% from its trough last October but down 25% compared to a year ago.
Excellent credit can save home buyers $348 a month
This season’s home shoppers should prepare for the home buying process by improving their credit as much as possible to qualify for the best mortgage rate.
For any buyer, even a small drop in the mortgage rate can save tens of thousands of dollars off the life of their mortgage loan. But a borrower with excellent credit (760-850) can qualify for a 30-year fixed mortgage rate of 6.0%.
A borrower with a “fair” credit score (620–639), by contrast, can qualify for a 7.58% rate, adding $348 to their monthly mortgage payment and nearly $125,431 in interest to the total cost of their 30-year fixed loan, based on today’s price for a typical U.S. home ($329,542).
What can you do to help?
With the spring home shopping season kicking off, the more value you bring to every conversation with a potential buyer or seller, the more likely they are to trust you, work with you, and refer you to others.
Be ready with the data and information they need to get the most value from their transaction, and don’t hesitate to recommend tools that can help your clients find homes they love and can comfortably afford.
A year from now, you want to see every one of your clients in better financial shape than they were before they met you.
