Homebuyers’ spending power takes hit as rates inch upward

With mortgage rates rising from the unprecedented lows they hit earlier in the pandemic, the spending power of potential homebuyers is taking a sizeable hit, according to a new report from Redfin.  

According to the national brokerage, a homebuyer would lose $23,250 in spending power with a mortgage rate of 3.25% — a figure which current rates are nearing — versus a 2.75% rate, where rates were earlier this year.

At a 3.25% interest rate, a homebuyer can afford a $506,000 home for $2,500 per month, down from the $529,250 they could afford on the same budget with a 2.75% rate. Put a different way, the monthly payment on a $506,000 home would rise $110 with the higher mortgage rate, from $2,390 to $2,500.

That somewhat restricts the pool of available homes for budget-conscious buyers. Consider that, with a 2.75% mortgage rate, 70.1% of homes nationwide that were for sale any time between January 26 and February 25 were affordable on a $2,500 monthly budget. With rates at 3.25%, the share of affordable homes at that budget recedes slightly to 68.4%.

Interest rates started to rise in mid-February after 30-year fixed mortgage rates reached a record low of 2.65% in the beginning of January, following five months of rates under 3% thanks to the Federal Reserve’s efforts to help the country’s economy recover from the COVID-19 crisis. Those historically low rates helped spur interested buyers into the marketplace and, with demand surging, pushed home prices to grow a near-record 14% year-over-year in January. With the economy slowly but steadily regaining its footing, mortgage rates, according to Freddie Mac, hit 3.02% in the week ending March 4 — the first time since July they rose above 3%.

Want more news, topics and trends?

Get perspectives on the mortgage industry from thought leaders by subscribing to Scotsman Guide’s free digital editions.


The forecast calls for growing rates for the foreseeable future, according to Daryl Fairweather, chief economist at Redfin. Notably, however, Fairweather doesn’t necessarily see it slowing down the hot market significantly just yet.

“If the $1.9 trillion economic stimulus package that’s set to provide cash relief to Americans and get people back to work is successful, interest rates are likely to inch back up to pre-pandemic levels of about 3.5%,” Fairweather said. “That would alter the dynamics of the housing market, though it wouldn’t necessarily put a damper on it.

“The financial relief coming to families earning less than $150,000 will give more of them the desire and means to buy a home. That will result in more demand for affordable homes. That’s different from what we’re seeing now, which is a housing market driven by wealthy people purchasing relatively expensive homes. Higher mortgage rates will also make buyers more price conscious and less likely to bid 10% or more over asking, so we could see some of the intense competition slow down.”

It’s worth nothing that growth in the number of homes going under contract has begun slowing in recent weeks, according to Redfin’s data. But it’s still too early to tell whether that slowdown is due more to rising mortgage rates or because of other factors, like winter storms in active homebuying states like Texas or a diminishing number of homes or sale. It’s also too early to tell if that trend will persist in the weeks ahead.  

“Over the next few months, it will be important to keep an eye on inflation,” Fairweather added. “Inflation has the potential to change every aspect of homebuyers’ finances: It could change earnings, change budgets and change mortgage rates.”

At least for now, Redfin is reporting that rising rates have caused been little to no change in buyer activity. And in a recent Redfin survey, 44% of respondents said rates reaching above 3.5% would have no impact on their homebuying plans, while just 10% said they would cancel their plans to buy a home.

“The small increase in mortgage rates has had zero impact on buyers so far,” said Ben Stanfield, a Redfin agent in Seattle. “Rates are still historically low and they’re still keeping buyers in the market. Even though rates are creeping up, they’re not increasing nearly as quickly as home prices.

“If you can buy, it’s a good idea to buy now before homes become even more expensive.”


More Headlines