Higher Mortgage Rates Are Costing the Average Home Buyer Up to $165,000 in Purchasing Power

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  • High property values are making homeownership unattainable for a lot of people.
  • Rising mortgage rates are only compounding the problem.
  • If you're thinking of buying a home, make sure all the expected expenses fit in your budget.

It's no wonder so many prospective buyers are struggling.

Right now, we're deep in the throes of an expensive housing market. But that's been the case since the latter part of 2020, when inventory dropped and buyer demand began to exceed property listings.

But while sky-high home prices are hardly a new thing, a more recent development in the housing market is rising mortgage rates. Since the beginning of 2022, borrowing rates have risen sharply. And at several points this year, the average 30-year mortgage rate surpassed the 6% mark.

That's putting a lot of would-be buyers in a tough position. And it's also causing them to lose out on purchasing power in a very big way.

Buyers are losing out

Home prices are unlikely to drop substantially anytime soon. That's because the real estate market still lacks inventory in a serious way. But now, higher mortgage rates are causing problems for buyers and are forcing many to take a step back in the absence of being able to afford a home.

In fact, a recent study from Redfin reveals that rising mortgage rates have cost some home buyers up to $165,000 in purchasing power. Specifically, buyers with a monthly mortgage budget of $3,500 -- not a small amount -- may now need to spend $165,000 less on a home due to soaring borrowing rates.

Of course, Redfin's numbers make certain assumptions, such as a 20% down payment on a home and a relatively low property tax rate. But all told, it's clear that higher mortgage rates are making it so that buyers have to shrink their budgets in the course of house hunting. And higher rates might also be driving more buyers out of the market completely.

Can you afford to buy a home today?

As a general rule, your housing costs, including your mortgage payment, property taxes, homeowners insurance, and other recurring expenses, should not exceed 30% of your take-home pay. With mortgage rates sitting at their current levels, that could put you over that threshold, assuming you don't want to make major compromises on the home you buy (like settling for a much smaller space or a fixer-upper home).

If that's the case, you may want to sit out the current real estate market and wait for inventory to increase. Once that happens, it should narrow the gap between current buyer demand and supply, thereby leading to a modest drop in home prices.

Of course, waiting to buy could mean opening yourself up to higher mortgage rates. That's unfortunately a risk taken by buyers who drop out of the market. But ultimately, if you can't afford a reasonable home based on today's listing prices and mortgage rates, it's a route you might have to take.

Stretching your budget to buy a home is a move you're more likely than not to regret. And so rather than go that route, work on socking away more cash reserves and waiting for the housing market to cool off, which it's apt to do over time.

Our Research Expert

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