Homebuyers on $2,500 Monthly Budget Lose $118,000 in Spending Power in 2022

Redfin, Seattle, said a homebuyer on a $2,500 monthly budget has lost nearly $120,000 in spending power since the end of last year as mortgage rates have nearly doubled.

Redfin said that buyer can afford a $399,750 home at today’s mortgage rate of nearly 6%, $117,750 less than the $517,500 home the same budget could have bought at the end of last year when rates were at a near-record-low of 3%. The monthly payment on a $399,750 home has risen more than $500 with the higher mortgage rate, from $1,931 to $2,500.

Nationwide, 45.6% of homes for sale are affordable on a $2,500 monthly budget with a 6% interest rate. By comparison, 61.6% would be affordable if rates were still at 3%. That’s according to a Redfin analysis of homes for sale from May 15 to June 15, and assumes a 20% down payment, a 30-year mortgage, 1.25% property tax rate, 0.5% homeowners’ insurance rate and no HOA dues.

“Higher mortgage rates are necessary to cool down the red-hot housing market. They’re already slowing competition, but they’re also putting buyers in a tough spot,” said Redfin Chief Economist Daryl Fairweather. “The increase in monthly payments means many house hunters now need to consider smaller homes—perhaps farther from their ideal neighborhood—or stick to renting if they’re priced out of the market altogether. And for sellers, smaller homebuyer budgets mean they can no longer expect to get top dollar for their home.”

The report noted homebuyers have fewer options with a 6% interest rate in all 50 of the most populous U.S. metros—but the impact is biggest in places that were hot homebuying destinations during the pandemic: Phoenix, Raleigh, Las Vegas, Salt Lake City and Austin.

In Phoenix, 21.5% of homes for sale from May 15 to June 15 were affordable on a $2,500 monthly budget and a 6% interest rate. By comparison, about 50% would be affordable if rates were still at 3%. That’s the biggest gap of all the metros in this analysis. In Raleigh, 33.2% of homes are affordable with the 6% rate, compared with 61.1% with a 3% rate, and in Las Vegas it’s 30.7%, compared with 56.7%. Eleven percent of Salt Lake City for-sale homes are affordable with a 6% rate, compared with 36.4%, and in Austin it’s 13.6%, compared with 38.4%.

The smallest impact is in the Bay Area, because so few homes are affordable on a $2,500 budget no matter the interest rate.