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Falling mortgage rates boost home buyers’ purchasing power by almost $40,000 — but also bring back bidding wars


As mortgage rates fall, aspiring homeowners have gained nearly $40,000 in buying power in a matter of months, according to a new report. 

But that power comes with a catch: increased competition. 

Now that the 30-year mortgage rate has fallen from nearly 8% to below 7%, home buyers with a monthly housing budget of $3,000 can afford a house that costs nearly $40,000 more, real-estate brokerage Redfin

said in a report on Monday.

When rates were at 7.8% in October 2023, a home buyer with a monthly housing budget of $3,000 could have afforded a $416,000 home. That assumes a down payment of 20%, a property-tax rate of 1.25% and a homeowners-insurance rate of 0.5%.

But with mortgage rates at 6.7% in January 2024, a home buyer with the same budget could afford a $453,000 home — a gain of $37,000.

“To look at affordability from another perspective, the monthly mortgage payment on the typical U.S. home, which costs roughly $363,000, is $2,545 with a 6.7% rate,” Redfin noted in the report. “The monthly payment was nearly $200 higher — $2,713 — when rates were at 7.8%.”

With rates expected to continue to fall, perhaps even below 6%, home buyers’ budgets could be boosted even further.

Drop in mortgage rates sparks home-buying competition

The drop in mortgage rates also creates some new challenges for home buyers. The decline has prompted a jump in demand, as buyers who had been waiting on the sidelines for rates to drop are now actively looking for homes. That is heating up the market, one real-estate agent said.

“Bidding wars are picking up,” Shoshana Godwin, a Seattle-based Redfin Premier agent, said in a statement. “I’ve seen a few homes get 15-plus offers recently, and one got more than 30.”

Homeowners who secured a 30-year mortgage rate below 4% before or during the pandemic have little incentive to sell, since they would have to take out a new mortgage at a far higher interest rate. 

That dynamic, dubbed the lock-in effect, resulted in the number of homes sold in 2023 dropping to a 29-year low. 

Buyers likely recall the pandemic buying frenzy that was marked by multiple offers and bids going over asking prices, and they are trying to get ahead of that competition this time around.

“Late last year, many listings sat on the market as buyers sat on the sidelines, hoping for rates to drop,” Godwin said. 

“Now buyers are snapping up homes. because even though rates haven’t plummeted, people are realizing that the longer they wait to buy a home, the more competition they’re likely to face,” she said.

How much income do you need to buy a $400,000 home?

To buy a $453,000 home with rates at 6.7%, Redfin suggests that a buyer should be able to pay $3,000 a month.

Budgeting experts typically recommend that a household spend no more than 30% of its gross income on housing. People who spend more than that on housing are considered “cost-burdened.” To meet the recommended affordability guidelines on a $453,000 house, a buyer would have to hypothetically make at least $120,000 a year to comfortably afford the mortgage and related homeownership costs.

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