Home buyers can afford $40K more house, Redfin finds

Homebuyers have gained at least $40,000 more in purchasing power as a result of mortgage rates falling at least 100 basis points since October. That shift has led to an increase in bidding wars, Redfin said.

A potential buyer with a budget of $3,000 per month for their payments is now able to afford an approximately $453,000 home at the current average rate for the 30-year fixed mortgage at just under 6.7% as measured by Freddie Mac.

When the 30-year FRM peaked at 7.79% in October (anecdotal reports had some lenders offering 8% mortgages), buyers at that same $3,000 budget could only afford a $416,000 property.

Mortgage rates are unlikely to move meaningfully as the market moves forward, Redfin Chief Economist Darryl Fairweather said in a press release, echoing what her colleagues at Freddie Mac said in their Primary Mortgage Market Survey report last week.

That means that buyers will not gain anything if they are looking to time the market, as they did during the "golden window" of record low rates in 2021, she stated.

"Instead, buyers should consider their own personal and financial circumstances: What matters most is whether the home meets your needs long term and whether you can afford it," Fairweather said.

At current rates, the monthly payment for a typical U.S. home with a sales price of roughly $363,000, is $2,545. But that payment was nearly $200 higher each month, at $2,713, when rates were at 7.8% the last week of October.

These calculations were based on an 80% loan-to-value ratio, property tax rates of 1.25% and a 0.5% homeowners' insurance payment rate.

Consumers are reentering the market; using the Mortgage Bankers Association Weekly Application index as a guide, purchase volume rose another 7.5% last week, sustaining its early 2024 strength.

If anything, buyers are getting more aggressive in their pursuit, as those falling rates have yet to make an impact on the lack of for sale inventory. That shortage was one item highlighted by Sen. Elizabeth Warren, D.-Massachusetts, in her call for the Federal Open Market Committee to lower rates at its meeting this week..

"I've seen a few homes get 15-plus offers recently, and one got more than 30," said Shoshana Godwin, a Redfin Premier agent in Seattle. "Late last year, many listings sat on the market as buyers sat on the sidelines, hoping for rates to drop. Now, buyers are snapping up homes because even though rates haven't plummeted, people are realizing that the longer they wait to buy a home, the more competition they're likely to face."

A metric known as "real home prices" increased 11% in November on an annual basis, the latest information available from First American Data & Analytics, which adjusts values for the impact of income and interest rate changes on consumer house-buying power over time and across the United States.

"Since [November 2022], house prices have resumed an upward trend as housing demand continues to outpace supply," said Mark Fleming, chief economist at First American, in a press release. "Despite affordability challenges driven by elevated mortgage rates, November 2023 data indicates that home prices reached a new peak for the tenth month in a row."

Household income needs to increase to address any decline in affordability, which is a measure of both interest rates and home prices.

"Even though household income increased 3.4% since November 2022 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher rates and rising nominal prices," Fleming said.

The median sales price of homes in the U.S. accelerated 4% on a year-over-year basis to $403,714 in December, the largest since October 2022, Redfin previously reported.