A homebuyer on a $2,500 monthly budget can afford a $400,000 home for the first time in four months as mortgage rates dip below 6 percent, according to a new report from Redfin.
To look at the change in affordability another way, a buyer with a $2,500 monthly budget can afford to spend about $35,000 more on a home than they could have when rates peaked at over 7 percent in November.
A buyer on that budget still has about $95,000 less in spending power than they did a year ago, when rates were sitting around 3.5 percent. But rates dropping by more than a full percentage point from their apex is a relief for buyers who had been waiting for rates to come down, Redfin said.
Some of those buyers are returning to the market. Pending home sales fell 23 percent from a year earlier during the four weeks ending Jan. 29, the smallest decline since September and a notable improvement from November, when pending sales declined 33 percent annually, according to Redfin.
Redfin’s Homebuyer Demand Index is up 19 percent from the October low. The market is gaining steam, too, with 37 percent of newly listed homes accepting an offer within two weeks of hitting the market, the highest level since July.
Homesellers are also starting to come off the sidelines. New listings of homes for sale declined 17 percent year-over-year, the smallest decline in over four months and an improvement from December, when new listings dropped 24 percent annually.
“We expect more homebuyers and sellers to gradually return to the market by springtime, but mixed economic news and mixed reactions from the market mean the recovery will be uneven,” Redfin Economics Research Lead Chen Zhao said in a release. “The Fed’s interest-rate hike this week, for example, is both promising and disappointing. The Fed hiked rates at a slower pace than last year, which means mortgage rates are unlikely to rise further. But it also signaled ongoing rate increases to fight inflation, which will likely prevent the steep mortgage-rate decline that some optimistic buyers have been waiting for.”
Mortgage-purchase applications rose 15 percent from their early-November trough but declined 10 percent from a week earlier, which could reflect the touch-and-go nature of the housing market recovery, Redfin said. It’s worth noting that it’s hard to draw a strong conclusion from this week’s decline because the mortgage purchase application index has been volatile the past few weeks.
Leading indicators of homebuying activity:
• For the week ending Feb. 2, average 30-year fixed mortgage rates ticked down to 6.09 percent, hitting their lowest level since September.
• Mortgage-purchase applications during the week ending Jan. 27 declined 10 percent from a week earlier, but they were up 15 percent from their early-November trough, seasonally adjusted. Purchase applications were down 41 percent from a year earlier.
• The seasonally adjusted Redfin Homebuyer Demand Index hit its highest level since September during the four weeks ending Jan. 29. It was up 5 percent from a month earlier, but down 25 percent from a year earlier.