The rapidly rising interest rates are forcing homebuyers in the U.S. to settle for significantly smaller homes.
For buyers with a $3,000 monthly budget for housing, the median-size home considered affordable has gone down in the past year by more than 100 square feet in the majority of the biggest U.S. markets, according to analysis from Redfin.
The rising rates are converging with home prices that are still significantly more elevated than they were a year ago.
A buyer in San Diego with a $3,000 monthly budget can a home that’s 931 square feet at the current mortgage rates. The same buyer could have purchased a 1,366-square-foot home a year ago when rates were around 3%.
The Redfin analysis looked at the prices, supply of homes for sale, and mortgage rates on September 29, 2022, compared to September 30, 2021. The analysis includes the 50 most populated metros, assuming a 20% down payment on the list price of houses for sale, not including taxes, insurance, or HOA fees.
San Diego’s 435-square-foot difference is the biggest in the country, but similar trends are being seen across the country.
Many would-be homebuyers are leaving the market altogether, because they can’t afford the home they want, leading to big dips in sales. For buyers who need a home now and might still be able to afford to buy, they have to compromise, and sometimes quite a bit.
In theory, rising mortgage rates should cause home prices to decline enough to make up for the added monthly interest cause so buyers can afford a home of the same size. However, home prices haven’t fallen from their 2022 highs in most metros, and they haven’t declined overall from a year ago, except for the Bay Area and a few other locations. Pervasively high home prices are due largely to a lack of inventory.
To go back to the San Diego example, home prices in August were up 7% year-over-year, from a median of $749,000 to $800,000. Even without higher mortgage rates, monthly payments would be more expensive, but with rates more than doubling, they’re far more costly. A buyer in San Diego purchasing a median-priced home currently would pay more than $5,000 per month with a rate of 6.7%, and now rates are more than 7%. That’s up from around $3,500 for the median-priced home last year with a 3% rate.
Newark, New Jersey, comes in behind San Diego for the biggest declines in the home size buyers can afford. Now, a Newark buyer with a $3,000 monthly budget can afford a 1,726-square-foot home, whereas a year ago, they could have afforded a 2,156-square-foot home.
Markets seeing similar trends include Nassau County, NY, Denver, CO, and Portland, OR.
The increasing interest rates on mortgages impact sizes and affordability differently depending on the metro because prices and annual price growth vary based on location. The mix of available homes also affects these figures.
In 29 of 50 metros in the Redfin analysis, mortgage rates have cut at least 100 square feet off the homes buyers can afford.
If we assume that a bedroom is around 130 square feet on average, in some cities, people who could have afforded a three-bedroom home last year can only afford a two-bedroom in the same location.
The typical home that people can afford on a $3,000 budget is under 1,000 square feet in six metros—San Diego, San Jose, Anaheim, Oakland, San Francisco, and New York. A year ago, just San Francisco would have been in that category.
Interestingly in Tampa and Virginia Beach, buyers can afford a slightly bigger home—21 square feet, to be exact, compared to what they could afford a year ago. Despite the doubling interest rates, the reason for this is that the homes for sale differ from last year. They’re potentially larger, but they have less value in different ways; for example, they might need renovations or be in less popular locations.
