A Typical Boston Homebuyer’s Monthly Housing Costs Jumped $225 Thanks to Mortgage Rate Hikes

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A Typical Boston Homebuyer’s Monthly Housing Costs Jumped $225 Thanks to Mortgage Rate Hikes

Similar increases are common in many other markets, leading buyers to ask: “Should I wait and see if prices fall or buy before mortgage rates go up even more?”

If you’re currently searching for a home to buy, or thinking about buying sometime soon, mortgage interest rates are probably on your mind. The rate hikes and home price growth over the past year have resulted in a more than $300 increase in monthly mortgage payments for a potential homebuyer in a market like Portland, Oregon, where the median home price was $445,000 in August. Which leaves those still in the market to buy wondering—should I buy now, or wait and see if home prices fall?

A homebuyer with a housing budget of $2,500 a month and a 20 percent down payment could afford to purchase a home for as much as $473,750 at the beginning of the year when 30-year mortgage rates were averaging around 4 percent. Now that rates have climbed above 4.75 percent, that same buyer can only afford to buy a home for up to $444,000—a loss of $29,750 in purchasing power.

Home prices in some of the hottest markets have been inching down over last few months as the market quickly cooled off. Prices are still higher than they were a year ago, but price growth is slowing in the coastal markets where homes are sitting on the market longer, more homes are available to choose from, and more sellers are dropping their prices.

“Every fall and winter we see prices decline relative to spring and summer, but this year’s seasonal declines have been more extreme as buyers, especially in coastal markets, are finally reaching a limit in terms of how much they are willing to pay,” explains Redfin chief economist Daryl Fairweather. “Sellers haven’t quite come to terms with the fact that they no longer have buyers wrapped around their finger. This push and pull is likely to continue until early 2019 when the home-buying season picks back up.”

How much home can you buy on a variety of fixed monthly payments as mortgage rates rise?

Rates are expected to continue rising through into 2019, which will have a direct effect on the number of homes that are affordable to buyers.

Let’s say you’re looking for a three-bedroom, two-bathroom home. If your monthly house payment budget is $3,500, an increase in mortgage rates from 5.0 percent to 5.5 percent would reduce the number of homes for sale that you could afford by over 15 percent in Orange County, Honolulu, and San Jose, California. In Boston, Seattle, Los Angeles, and San Diego your selection shrinks by 10 to 14 percent.

Table: Number of Affordable 3-bed, 2-bath Homes For Sale at $3,500 Mortgage Payment

For this table we used the relatively high monthly mortgage payment of $3,500, which is enough to purchase a home around the median price in many coastal markets. The data show that even with a budget this high, your selection of homes for sale can be dramatically affected by rising rates.
Metro Area Number of Homes affordable at 4% Mortgage Rate Number of Homes affordable at 5% Mortgage Rate Number of Homes affordable at 6% Mortgage Rate Change in # of Homes Affordable from 4% to 5% Mortgage Rate Change in # of Homes Affordable from 5% to 6% Mortgage Rate
Boston, MA 1,542 1,351 1,129 -12% -16%
Denver, CO 4,092 3,723 3,310 -9% -11%
Honolulu, HI 406 290 201 -29% -31%
Long Island, NY 5,250 4,702 4,074 -10% -13%
Los Angeles, CA 4,260 3,568 2,810 -16% -21%
Oakland, CA 801 616 424 -23% -31%
Orange County, CA 917 605 360 -34% -40%
Portland, OR 4,736 4,362 3,890 -8% -11%
Sacramento, CA 3,648 3,377 3,043 -7% -10%
San Diego, CA 2,249 1,805 1,336 -20% -26%
San Jose, CA 110 67 44 -39% -34%
Seattle, WA 2,892 2,396 1,942 -17% -19%
Washington, DC 8,017 7,461 6,854 -7% -8%

With a monthly housing budget of $2,500, if rates rise to 5.5 percent, the number of listings on the market that a buyer can afford decreases by 10 to 20 percent in Sacramento, Long Island, Denver, and Portland, Oregon.

If prices actually fall next year (which is not currently expected in most markets), falling prices could offset the cost of rising mortgage rates. However, the bigger your budget, the bigger home price drops you’ll need to see in order to balance out increasing mortgage rates. For example, if your budget is $2,500 a month, you would need to pay $18,000 less for your home to make up for a jump in mortgage rates from 5 percent to 5.5 percent, but if your budget is $3,500 a month, your home price needs to be $25,250 less to keep your payment the same. In most markets that means you’ll be looking at homes that are 100-200 square feet smaller.

Thinking of making a move now before rates go up? Talk to your mortgage advisor or broker to find out how the numbers work for you. If you’re in one of our service areas you can contact Redfin Mortgage for a complimentary one-on-one consultation with a Redfin Mortgage advisor to discuss how much house you can afford. You can also try out different scenarios for yourself in Redfin’s Home Affordability Calculator.

Methodology

The home prices in listed in the chart and examples above are calculated based on the maximum loan a buyer could pay with the given monthly payments, assuming a 20% down payment plus property taxes (1.25% rate) and insurance (annual premium 0.5% of home value). HOA dues were not included in the calculations.

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