Rising Rates Mean Less Home For The Money

What do rising interest rates mean for homebuyers?

A whole lot, it turns out.

A new report released by Redfin on Monday found that homebuyers lose $23,250 in spending power with a mortgage rate of 3.25 percent versus a 2.75 percent rate, where they were sitting earlier this year.

For example, a homebuyer can afford a $506,000 home for $2,500 per month at a 3.25 percent interest rate – down from the $529,250 they could afford on the same budget with a 2.75 percent rate. To put it another way, the monthly payment on a $506,000 home would rise $110 with the higher mortgage rate, from $2,390 to $2,500.

“If the $1.9 trillion economic stimulus package that’s set to provide cash relief to Americans and get people back to work is successful, interest rates are likely to inch back up to pre-pandemic levels of about 3.5 percent. That would alter the dynamics of the housing market, though it wouldn’t necessarily put a damper on it,” Redfin Chief Economist Daryl Fairweather said. “The financial relief coming to families earning less than $150,000 will give more of them the desire and means to buy a home. That will result in more demand for affordable homes. That’s different from what we’re seeing now, which is a housing market driven by wealthy people purchasing relatively expensive homes.”

As of last week, interest rates averaged 3.02 percent – well up from the 2.65 percent in early January.

“The small increase in mortgage rates has had zero impact on buyers so far,” Seattle Redfin agent Ben Stanfield said. “Rates are still historically low and they’re still keeping buyers in the market. Even though rates are creeping up, they’re not increasing nearly as quickly as home prices. If you can buy, it’s a good idea to buy now before homes become even more expensive.”

Redfin reports that 68.4 percent of homes nationwide that were for sale any time between January 26 and February 25 were affordable on a $2,500 monthly budget at a 3.25 percent interest rate. With a 2.75 percent rate, 70.1 percent of homes were affordable on that budget.

Here’s how the market looks in metropolitan areas across the country:

Metro areaShare of homes affordable on a $2,500 payment @ 2.75%Share of homes affordable on a $2,500 payment @ 3.25%Change in share of homes affordable, 2.75% vs. 3.25%
Atlanta, GA79.5%77.7%-1.7 pts
Austin, TX65.5%63.3%-2.2 pts
Baltimore, MD80.2%78.5%-1.7 pts
Birmingham, AL87.7%87.3%-0.4 pts
Boston, MA36.5%33.8%-2.7 pts
Buffalo, NY92.8%92.0%-0.7 pts
Charlotte, NC79.9%78.4%-1.5 pts
Chicago, IL76.3%74.7%-1.6 pts
Cincinnati, OH86.4%85.6%-0.8 pts
Cleveland, OH92.4%92.0%-0.4 pts
Columbus, OH88.6%87.4%-1.2 pts
Dallas, TX77.6%75.4%-2.1 pts
Denver, CO56.3%52.5%-3.7 pts
Detroit, MI93.3%92.9%-0.4 pts
Hartford, CT88.0%86.7%-1.3 pts
Houston, TX80.6%79.1%-1.4 pts
Indianapolis, IN90.6%89.6%-1.0 pts
Jacksonville, FL83.7%82.7%-1.0 pts
Kansas City, MO84.8%83.5%-1.3 pts
Las Vegas, NV79.7%78.0%-1.7 pts
Los Angeles, CA17.6%15.8%-1.8 pts
Louisville, KY90.1%89.5%-0.6 pts
Memphis, TN89.1%88.1%-1.0 pts
Miami, FL61.3%59.5%-1.7 pts
Milwaukee, WI89.0%88.1%-0.9 pts
Minneapolis, MN79.6%77.5%-2.1 pts
Nashville, TN75.5%73.6%-1.9 pts
New Orleans, LA80.6%79.2%-1.4 pts
New York, NY33.9%32.0%-1.9 pts
Oklahoma City, OK88.6%87.7%-0.9 pts
Orlando, FL83.0%81.6%-1.3 pts
Philadelphia, PA82.0%80.6%-1.5 pts
Phoenix, AZ70.7%68.9%-1.8 pts
Pittsburgh, PA89.1%88.4%-0.7 pts
Portland, OR58.5%55.3%-3.2 pts
Providence, RI77.4%76.0%-1.4 pts
Raleigh, NC81.8%80.2%-1.7 pts
Richmond, VA82.7%80.9%-1.8 pts
Riverside, CA60.7%57.3%-3.4 pts
Sacramento, CA50.6%47.0%-3.7 pts
Salt Lake City, UT56.8%54.4%-2.4 pts
San Antonio, TX86.5%85.1%-1.4 pts
San Diego, CA23.1%20.6%-2.6 pts
San Francisco, CA4.8%3.8%-0.9 pts
San Jose, CA4.6%3.9%-0.7 pts
Seattle, WA30.7%28.0%-2.7 pts
St. Louis, MO89.6%88.8%-0.7 pts
Tampa, FL81.4%80.2%-1.1 pts
Virginia Beach, VA89.3%88.2%-1.1 pts
Washington, DC58.7%55.8%-2.9 pts
National70.1%68.4%-1.7 pts