TheMReport — News and strategies for the evolving mortgage marketplace.
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50 | M R EP O RT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST ORIGINATION Rising Rates Shrinking Homebuyer Aspirations As mortgage rates creep toward the 7% mark, buyers still in the market are being forced to downgrade their options for a larger home, cutting more than 400-square feet out of the homes on the market. R ising mortgage rates, combined with contin- ued high home prices, have cut more than 400-square feet out of homes affordable to San Diego home- buyers on a $3,000-per-month budget, according to the latest findings from Redfin. The report found that a San Diego homebuyer with a $3,000 monthly budget can now only afford a 931-square-foot home as today's mortgage rates edge toward the 7% mark, down from the 1,366-square-foot home the same buyer could have purchased just one year ago when rates were sitting near the 3% mark. The 435-square-foot difference in San Diego is the biggest of the 50 most populous U.S. metros for buyers with a $3,000 monthly budget. But the sharp increase in mortgage rates to their highest level in 15 years is cutting into homebuyer budgets across the country. High rates are mak- ing monthly housing payments significantly more expensive, espe- cially because home-sale prices in most areas remain higher than they were a year ago. The week prior, Freddie Mac reported the 30-year fixed-rate mortgage (FRM) took another big step toward the 7% mark, with the FRM averaging 6.70% with an average 0.9 points as of September 29, 2022, up from the previous week when it averaged 6.29%. A year prior, the 30-year FRM averaged more than half that at 3.01%. "Soaring mortgage rates are throwing a wrench into prospec- tive buyers' plans," Redfin Senior Economist Sheharyar Bokhari said. "Many would-be buyers are dropping out of the market because they can no longer afford the home they want, resulting in a dramatic dip in home sales. For buyers who need a home right now—and can still afford it—com- promise is the name of the game. Some buyers will choose to sac- rifice on location or move further away from the city center so they can get the space they want, while others will settle on a smaller home in their ideal location." Further exacerbating the home- buyer dilemma, are continued inflationary concerns, as the typical homebuyer's monthly mortgage payment has climbed $337—or 15%— over the past six weeks to a new high of $2,547, according to Redfin. Redfin economists forecast that rising mortgage rates should theoretically cause home prices to fall enough to compensate for the additional monthly interest cost, which would mean buyers could afford the same-sized home. But as home prices have fallen from their 2022 peak in most metros, they haven't fallen from a year ago anywhere except the Bay Area and a few other places—largely because of a lack of housing supply. In San Diego, for example, home prices were up 7% year over year in August 2022, ris- ing from a median of $749,000 to $800,000. Homebuyers' monthly housing payments would be more expensive even without higher mortgage rates, but with rates more than doubling, they're significantly more expensive. A San Diego buyer purchasing the median-priced home today would pay more than $5,000 per month with a 6.7% rate, up from about $3,500 for last year's median- priced home with a 3% rate. That means buyers need to search for cheaper homes, which typically translates to smaller ones. Following San Diego, the Newark, New Jersey, region experienced the largest decline in the size of homebuyers can afford. A Newark buyer on a $3,000 monthly budget was able to afford a 1,726-square-foot home today, down from 2,156 square feet just a year ago. Rounding out the top five and trailing San Diego and Newark, was Nassau County, New York, coming in at third (1,300 square feet, down from 1,712 square feet); Denver (1,571 square feet, down from 1,933 square feet); and Portland, Oregon, (1,504 square feet, down from 1,800 square feet). As mortgage rates have more than doubled, that phenomenon has cut at least 100-square feet out of the homes in would-be buyers' price range in 29 of the 50 metros in Redfin's analysis. Today, the typical home af- fordable on a $3,000 budget is under 1,000-square feet in six of the metros in the analysis: San Diego; San Jose; Anaheim, California; Oakland, California; San Francisco; and New York. A year ago, just San Francisco fell into that category.