BAM Key Details:

  • According to a Redfin report, the typical homebuyer’s monthly mortgage payment hit a new all-time high of $2,563.
  • On the other end of the spectrum, Redfin reports rents have dropped to the lowest level in a year. 

The dream of owning a home is becoming more elusive than ever before. According to a new Redfin report, homebuyers are facing a daunting challenge as their spending power declines. The reason? With monthly mortgage payments at an all-time high, buyers are getting priced out of the market. 

With mortgage rates sitting around 7%, the typical homebuyer is now shelling out $2,563 each month. That’s a 29% increase from a year ago when the typical payment was $1,988. And in 2021, the typical monthly mortgage payment was just $1,427, according to the U.S. Census Bureau’s American Housing Survey.

The consequences are clear as we enter the spring market: buyers are hesitating to take the plunge, and sellers are reluctant to list their homes.

A Look at Homebuyer Spending Power

For many prospective homebuyers, the dream of owning a home is slipping further out of reach. Despite a slight dip in the median home sale price to $352,750 (a -1.2% decrease compared to a year ago), the burden of increased mortgage rates is hitting them hard. 

To put it into perspective, let’s look at some numbers based on Redfin’s findings. The following numbers are for a homebuyer with a monthly budget of $2,500:

  • With today’s average mortgage rate around 7%, buyers can afford a $376,000 home. 
  • A month ago, when rates dropped to 6%, the same budget could afford a $400,000 home.
  • A year ago, with rates around 3.85%, the same buyers could afford a $480,000 home. 

It’s no surprise that many buyers are putting their home search on hold. Typically, pending home sales increase during the spring months, but this year, new pending sales have remained almost stagnant week-over-week, with a -16.1% decrease in pending sales compared to a year ago.

pending sales

Source: Redfin

And it’s not just buyers who are feeling the sting of current market conditions. Sellers are also hesitant to list their homes, as they want to hold on to their low rates, many of which are locked in at under 5%.

new listings

Source: Redfin

All eyes are on inflation as it continues to have a huge impact on mortgage rates and the housing market. The Fed said this week that it may hike interest rates more than anticipated to combat persistent inflation. That news kept mortgage rates propped up, but next week’s official February inflation reading could send them meaningfully up or down. Homebuyers and sellers are ultra-sensitive to mortgage-rate fluctuations, so rates starting to decline would likely bring some buyers and sellers back—and rates rising would push more away.

Taylor Marr

Deputy Chief Economist, Redfin

As Monthly Mortgage Payments Increase, Rent Growth is Slowing

While affordability remains a hurdle that is stopping many from buying a home, rent prices are continuing to level out, with February being the ninth straight month where rent growth slowed year-over-year.

Another recent Redfin report shows the median asking rent is up 1.7% from a year ago — the smallest gain in almost two years. At $1,937, the median asking rent is at its lowest level in a year—and well below the $2,563 monthly mortgage payment for today’s typical buyer.

rent payment

Source: Redfin

The choice between buying and renting is an important one. Most know that homeownership is a path to increased wealth—but it’s not always an option for those living paycheck to paycheck

With the real estate market in a state of flux, education is more important than ever. Work with prospects and clients to ensure they understand the financial impact of their choices. The housing market may be challenging right now, but with the right information and guidance, there are still opportunities to be found.