This post was originally published on Tim Thomas / Timothy Thomas Limited and we have permission to republish it here. It’s a great post that highlights a recent report by Redfin about how even wealthy homebuyers are finding their budgets reduced.
It’s no secret that buying into the housing market has become increasingly more difficult (read: expensive).
Unsurprisingly, this has had significant knock-on effects for potential homebuyers who face higher mortgage rates.
A report by Redfin found that a buyer with a budget of $2,500 can now afford a $400,000 house with current interest rates, compared to a property worth $517,000 a few months back.
Let’s examine what this significant change means and whether it spells an upcoming market crash.
What the Redfin Report Found
The average mortgage rate for a 30-year fixed-rate mortgage is now just under 6%.
In contrast, average mortgage rates were hovering around the 3% mark in 2021 — quite the quick turnaround.
Since mortgage rates determine the size of monthly payments — and a buyer’s ability to afford a mortgage largely depends on whether monthly payments are within their budget — this is a huge blow to buyers.
And the figures reflect this. When the average mortgage rate was 3%, a buyer with a budget of $2,500 for monthly payments could afford a house worth $517,500.
Now mortgage rates are 6%, making monthly payments of $2,500 would mean you can “only” afford a house worth $399,750.
That’s a drop of $118,000 in spending power.
Things may be slightly more affordable for those aiming for a 20-year or 15-year mortgage or who can put down a larger down payment — but realistically, both require significant capital and aren’t an option for everyone.
Few things are more important to prospective homebuyers than getting the house of their dreams within their budget, so this news is sure to come at a blow.
But what does it mean for the broader housing market?
Is This a Sign a Housing Market Crash is Coming?
Amid such difficult conditions, it’s only natural to wonder if a housing market crash will be the natural outcome.
For one, many people will now be priced out of the market and forced to continue renting.
The average house price in the US is $507,800, so the drop in affordability means that even buyers with a healthy monthly budget of $2,500 will not afford the average property.
This factor could mean that many people who want to buy can’t afford to do so and opt for renting instead.
Then some prefer to hold out, hoping a crash is coming. Both these factors should mean (in theory) that the demand for housing is decreasing, which typically indicates an eventual price decline.
But is this what we see in reality?
Home sales have slowed down a lot over the last few months, with home sales in May 2022 down from April 2022 to May 2021.
However, this doesn’t paint the complete picture.
For a proper market cooldown or stabilization, there needs to be a serious increase in the housing supply. Yet, the current housing inventory is still at a low point.
As a result, most houses are selling quickly, taking just 16 days on average for a property on the market to sell.
This could mean that there are still so few houses to go around that sellers don’t need to adjust their prices too much to attract buyers.
It’s also worth noting that, although the rising interest rates have made getting the house of your dreams harder for everyone, the impact is felt more in some places than others.
America’s big cities and metro areas have fared the worse. Overall, Redfin found that 45.6% of houses in the US would fall within a budget of $2,500 per month for mortgage payments (although this was previously 60% under mortgage rates of 3%).
But in some places, the percentage was considerably lower.
Just 13.6% of properties in Austin would fall within the same budget — compared with 38.4% before the interest rate hikes.
Places like Las Vegas, Salt Lake City, and Phoenix also saw significant drops.
However, if you’re hoping this could mean house prices are about to crash in some of the most desirable areas, like San Francisco and San Diego, the answer appears to be “no.”
These places previously had such few houses available within this range that the impact has been marginal for a buyer with this budget.
This real estate market remains reserved for only the most wealthy buyers.
Is the Worst Yet to Come?
Recent trends with inflation, interest rates, and the property market would make any prospective buyer pause in their tracks.
Only the brave would buy a house in this environment.
However, as we’ve seen, the lack of housing stock could mean that we won’t see a housing crash as dramatic as you might expect.
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Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
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Tim Thomas has investments in real estate.
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