Redfin economists predict the 30-year fixed mortgage rate will climb to 3.9 percent by the end of this year, according to a release. And if it does, home affordability is going to take a dive. Whereas a homebuyer with a $2,000 monthly housing budget could afford a $396,000 home at today’s approximated 3.5 percent rate, she would only be able to afford a $382,250 home if that rate jumps to 3.9 percent, according to the company’s new report.
The Fed has indicated that the series of interest-rate hikes will start in March. Last month marked the first-time rates surpassed 3.5 percent since March 2020, when the coronavirus pandemic was just beginning. The median home sale price jumped 14 percent 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 percent in January from the same period two years earlier. A December Redfin survey found that nearly half (47 percent) of house hunters would feel more urgency to buy a home if mortgage rates were to rise above 3.5 percent, which has now happened.
At a 3.9 percent interest rate, half (50.1 percent) of homes for sale nationwide in January were affordable for homebuyers on a $2,000 monthly budget, down from 52.2 percent at a 3.5 percent interest rate.
“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,” Redfin Chief Economist Daryl Fairweather said in the report. “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.”