Rising mortgage rates could offset the growing purchasing power of home buyers

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A new report from Redfin shows what the slow and steady rise in mortgage rates means for potential home buyers who have sat on the fence, hoping the lower rate will continue.

A home buyer will lose $ 23,250 in purchasing power at a 3.25% mortgage rate, up from the 2.75% rate they sat at earlier this year, according to a real estate brokerage.

At an interest rate of 3.25%, a buyer can afford a $ 506,000 home for $ 2,500 a month, compared to the $ 529,250 they could afford on the same budget at a 2.75% rate. In other words, the monthly payment for a $ 506,000 home would rise by $ 110 at a higher mortgage rate from $ 2,390 to $ 2,500.

Low rates have helped many buyers pay their monthly mortgage payments. Interest rates began to rise in mid-February after 30-year fixed mortgage rates hit a record low of 2.65% in early January, a continuation of five months of rates below 3% as the Fed worked to stimulate the economy during the downturn. caused by a pandemic.

Partly due to record low rates, there has been a steady rise in house prices, which rose by almost a record 14% year on year in January. The average mortgage rate was 3.02% for the week ending March 4 – the first time in seven months – topped 3% – and is likely to continue, at least marginally, as the economy recovers.

Growth in the number of contracted homes has begun to slow in recent weeks, but the Redfin report says it is too early to tell if the trend is the result of winter storms, a shortage of homes to sell, or higher mortgage rates, or whether it will be. tendency to continue in spring or not.

Redfin chief economist Daryl Fairweather said: “If the $ 1.9 trillion economic stimulus package to provide cash aid to Americans and get people back to work is successful, interest rates are likely to return to pre-pandemic levels of around 3.5%. This would change the dynamics of the housing market, although it would not necessarily stop it. ”

“Financial assistance to families with incomes less than US $ 150,000 will give more of them the desire and the means to buy a home,” she added. “This will increase the demand for affordable homes. This is in contrast to what we see now that wealthy people are buying relatively expensive homes in the housing market. Higher mortgage rates will also force buyers to be more price conscious and less likely to offer 10% or more than requested, so we may see some fierce competition slowing down. ”

Forty-four percent of respondents to a recent Redfin survey said that a rise in mortgage rates above 3.5% would not affect their home buying plans, while 10% would cancel their home buying plans.

“The slight hike in mortgage rates has not yet had any impact on buyers,” said Seattle Redfin agent Ben Stanfield. “The rates are still low and they continue to keep buyers in the market. Although rates are rising, they are not rising as fast as house prices. If you can buy, it’s a good idea to buy now, before houses get even more expensive. ”

At an interest rate of 3.25%, 68.4% of homes nationwide listed for sale anytime between January 26 and February 25 were available on a monthly budget of $ 2,500. At 2.75%, 70.1% of homes were affordable for that budget.

“It will be important to keep an eye on inflation over the next few months,” Fairweather said. “Inflation can change every aspect of homebuyer finance: it can change income, budgets and mortgage rates.”

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