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Study: How Would a 3.25% Mortgage Rate Affect Buyers?

In four Fla. cities considered, buyers with $2,500 monthly budgets would see the number of “homes I can afford” drop by about 1.5% compared to 2.75% interest rates.

SEATTLE – A homebuyer would lose $23,250 in spending power with a mortgage rate of 3.25% versus a 2.75% rate, where they were sitting earlier this year. At 3.25% interest, a homebuyer can afford a $506,000 home for $2,500 per month, down from the $529,250 they could afford on the same budget with a 2.75% rate, according to a new report from Redfin.

In four Florida cities included in the study, the changes are similar based on a $2,500 monthly budget:

  • In Jacksonville, 83.7% of homes are affordable if interest rates are a median 2.75%, but that drops to 82.7% of homes at 3.25%, for a low-end-of-the-scale drop of 1 percent point.
  • In Miami, 61.3% of homes are affordable at 2.75%, but that drops to 59.5% of homes at 3.25% – a 1.7-point drop.
  • In Orlando, residents can afford 83.0% of homes at 2.75% but only 81.6% at 3.25% – a 1.3-point drop.
  • In Tampa, 81.4% of homes are affordable at 2.75%, but only 80.2% at 3.25% – a 1.1-point drop.

Nationally, 68.4% of homes nationwide for sale any time between Jan. 26 and Feb. 25 were affordable on a $2,500 monthly budget at a 3.25% interest rate. But with a 2.75% rate, 70.1% of homes were affordable.

Interest rates started to rise in mid-February after the 30-year fixed rate reached a record low of 2.65% in the beginning of January after five months of sub-3% rates, a contributing factor in high-rising home sale prices that hit 14% year-to-year in January 2020.

“If the $1.9 trillion economic stimulus package that’s set to provide cash relief to Americans and get people back to work is successful, interest rates are likely to inch back up to pre-pandemic levels of about 3.5%,” says Redfin Chief Economist Daryl Fairweather. “That would alter the dynamics of the housing market, though it wouldn’t necessarily put a damper on it. … Higher mortgage rates will also make buyers more price conscious and less likely to bid 10% or more over asking, so we could see some of the intense competition slow down.”

Forty-four percent of respondents in a recent Redfin survey said mortgage rates rising above 3.5% would have no impact on their homebuying plans; 10% said they would cancel their plans.

“Over the next few months, it will be important to keep an eye on inflation,” Fairweather adds. “Inflation has the potential to change every aspect of homebuyers’ finances: It could change earnings, change budgets and change mortgage rates.”

© 2021 Florida Realtors®