Homebuyer budgets are stagnant from last year, up only 0.3% year-over-year nationwide in the three months ending on April 30, 2022. That is the slowest growth rate since June 2020, according to an analysis from Redfin.
Declining budgets are a leading indicator that home price growth has passed its peak and will slow in the coming months. It’s also a sign that high mortgage rates are having a major impact on how much money buyers can spend on homes, with more of their budgets going toward interest payments.
In April 2021, homebuyer budgets hit peak growth at a rate of 12.2% — three months before home-sale prices hit their peak growth, increasing a record 22.6% year-over-year in July 2021.
Redfin economists predict the cooldown in budgets will lead to a cooldown in price growth by two to three months as buyers typically search online months before they purchase a home. Sellers are slower to adjust to the cooling market, but they’re starting to respond to buyers’ declining budgets. Approximately 21% of home sellers dropped their asking price in the last four weeks, which is up 10% from a year earlier.
Budget growth started slowing at the beginning of this year. After increasing 5.1% year-over-year in December, budgets have declined every month since. It’s no coincidence that the cooldown coincides with sharply rising mortgage rates. Mortgage rates hovered around 3% for most of 2021, and now they’re sitting around 5.2% after a record-fast increase that started in January.
To put these interest rates into perspective, a 5.2% interest rate for a buyer on a $2,500 monthly budget can afford a home priced at $427,250. However, when rates were at 3%, a buyer on the same budget could afford a $517,500 home.
“When mortgage rates go up, buyers’ budgets go down,” Redfin Deputy Chief Economist Taylor Marr said. “And when buyers’ budgets go down, sellers have to meet buyers where they are. Budgets haven’t fallen from a year ago and we don’t expect home-sale prices to fall, either. But the fact that budget growth has slowed so significantly is one sign among many that home-price growth will continue to slow as the year goes on.”
The housing market is finally starting to turn in favor of buyers, although they still have to contend with higher mortgage rates. Sellers need to keep in mind that buyers, sensitive to mortgage rates, are gaining some power and they should price their home accordingly.
“Buyers are qualified to borrow less money because of rising rates, which means they’re searching for less expensive homes,” Fresno Redfin agent Dennis Rozadilla said. “There’s still limited supply and a surplus of buyers, but buyers are pickier now and their budgets are more limited.”
