If mortgage interest rates were to rise to 3.9%, a homebuyer with a $2,000 monthly housing budget could afford a $382,250 home. That’s down from the $396,000 home a buyer with the same budget can afford with a 3.5% rate—roughly where mortgage rates stand today. Put another way, the monthly payment on a $382,250 home would rise $69 with the higher mortgage rate, to $2,000 from $1,931.
Redfin economists predict the 30-year fixed mortgage rate will climb to 3.9% by the end of this year. Mortgage rates are expected to increase as the Federal Reserve raises interest rates in an effort to alleviate inflation. The Fed has indicated that the series of interest-rate hikes will start in March.
Interest rates started to rise at the end of last year after sinking to a record low of 2.65% in January 2021. The average 30-year fixed mortgage rate reached 3.55% during the week ending Feb. 3, 2022, up from 3.11% about a month earlier. Last month marked the first time rates surpassed 3.5% since March 2020, when the coronavirus pandemic was just beginning. Buyers are simultaneously grappling with surging housing prices; the median home sale price jumped 14% year over year in January to $354,750.
The rise in mortgage rates so far hasn’t put a damper on intense homebuyer demand. If anything, it has kept demand strong—pending home sales were up 38% in January from the same period two years earlier. A December Redfin survey found that nearly half (47%) of house hunters would feel more urgency to buy a home if mortgage rates were to rise above 3.5%, which has now happened.
“If rates were to rise much further in a typical market, we would expect there to be a turning point: Buyers would go from feeling more urgency to buy to feeling less urgency. That’s because rates would ultimately reach a point where renting is more feasible than buying,” said Redfin Chief Economist Daryl Fairweather. “But this isn’t a typical market. Rental prices are soaring too, so instead of renting, many buyers will likely purchase more modest homes in relatively affordable places to avoid increasing their monthly budget. That means buyer demand will remain strong for at least the next month and potentially longer, even as rates and prices continue to climb.”
Boise, ID Redfin agent Kristin Lopez also sees rising rates driving buyers to more modest homes.
“With home prices and mortgage rates increasing, we might start to see buyers trading space for smaller homes that are closer to amenities,” Lopez said. “So instead of purchasing large homes in the suburbs, many buyers may ‘settle’ for a smaller home or even a townhome closer to the city and then buy a bigger house later if they need more room.”
The first interactive chart below shows how much you could afford to spend on a home at different mortgage interest rates, with each line representing a different fixed monthly payment. You can view or download a static version of this chart here. The second chart shows how much your total monthly payment would be at different mortgage interest rates, with each line representing a different fixed home price.
At a 3.9% interest rate, half (50.1%) of homes for sale nationwide in January were affordable for homebuyers on a $2,000 monthly budget, down from 52.2% at a 3.5% interest rate. Popular migration destinations, including Austin, TX, Atlanta and Phoenix, saw outsized declines.
In Raleigh, 46.3% of homes for sale last month were affordable with that budget at a 3.9% interest rate, down from 50.1% at a 3.5% interest rate. That 3.8-percentage point decline was the biggest drop among the 50 most populous U.S. metropolitan areas. Next came Austin (-3.5 pts), Atlanta (-3.2 pts), Phoenix (-3.1 pts) and Houston (-3.1 pts).
Many of these metros have exploded in popularity during the pandemic as homebuyers with big budgets have moved in from expensive coastal cities to work remotely and get more bang for their buck. That has contributed to a surge in housing prices across the Sun Belt.
At a 3.9% interest rate, 89.4% of homes for sale in Detroit last month were affordable on a $2,000 monthly budget—the highest share among the 50 most populous metros. It was followed by Cleveland (85.4%), Buffalo, NY (83.4%), Pittsburgh (81.3%) and St. Louis (80.4%). Those same five places also had the highest share of homes affordable at a 3.5% interest rate.
In San Jose, just 0.2% of homes were affordable with that budget at a 3.9% interest rate—the lowest share among the top 50 metros. Next came San Francisco (1.6%), Los Angeles (3.8%), San Diego (4.3%) and Seattle (9%).
Share of homes for sale affordable on a $2,000 monthly mortgage budget: 3.9% interest rate versus 3.5% interest rate
The home prices listed in the interactive chart and examples above are calculated based on the maximum loan a buyer could pay with the given monthly payments, assuming a 20% down payment plus property taxes (1.25% rate) and insurance (annual premium 0.5% of home value). HOA dues were not included in the calculations. We used mortgage rates of 3.90% and 3.50% for the comparisons included in this report. We used asking prices to determine the share of homes affordable.
