Higher Mortgage Rates Are Reducing Homebuyers’ Purchasing Power

On Tuesday, Redfin reported that according to its latest data, a homebuyer on a $3,000 monthly budget has lost $33,250 in purchasing power over the last six weeks, with the daily average 30-year fixed mortgage rate rising to 7% on October 28th.

Redfins notes that this is the first time mortgage rates have hit 7% since the start of summer; they’re up nearly one percentage point from the 18-month low reached in mid-September. As a result, a homebuyer on a $3,000 monthly budget can afford a $442,500 home with the current 7% mortgage rate. The same homebuyer could have purchased a $475,750 home with a 6.11% rate—the average on September 17th.

A buyer still has $17,000 more purchasing power than they would have had in April, when mortgage rates peaked at 7.5%. But the recent rise in mortgage rates is disappointing for buyers who missed the short window of rates that were much closer to 6% than 7%. To look at affordability another way, the monthly mortgage payment on the $428,000 median-priced US home is $2,895 with a 7% mortgage rate. That’s about $200 higher than the $2,694 monthly payment with a 6.11% rate.

Mortgage rates are jumping largely because investors are becoming more worried about increased government spending after the election, Redfin says. Additionally, the most recent jobs and inflation reports both reflected a fairly strong economy, making it more likely the Fed makes a small interest-rate cut—as opposed to a big one—at their next meeting.