Steep Mortgage Rates Stunt Home Buying Power

The high-rate environment of today’s housing market leaves potential homebuyers with less purchasing power than last year, study shows.

A young woman sits on the floor with moving boxes.
(Image credit: Getty Images)

Rising mortgage rates and inflationary pressures have hit the housing market substantially over the last year, leaving homebuyers with considerably less purchasing power than in 2022, a new report shows.

Although the Federal Reserve has paused its rate-hiking campaign, mortgage rates remain elevated. As of October 11, the average 30-year mortgage rate stands at 7.83%, according to Bankrate — near more than 22-year highs. A recent report from Redfin shows mortgage rates have climbed from 6.6% to 7.7% year over year. Mortgage rates directly impact the monthly housing payment new home buyers are responsible for. As such, budgets won’t stretch nearly as far as they did last year.

For example, the lower rates of early 2022 (about 3.5%) with a $3,000 monthly payment budget would have allowed for a home priced at $595,000. Purchasing a home today with a 7.7% interest rate and the same monthly payment budget would only buy you a $419,000 home. That’s a drop of $176,000 in purchasing power over less than two years. 

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

For a closer year-over-year comparison, October of 2022 saw rates at around 6.6%. If you bought a home at that time, you’d still be able to afford almost $40,000 more than today’s buyers. That $3,000 monthly budget would’ve allowed a home purchase of $457,000. 

High prices and low inventory

Buyers willing to brave the high-rate environment will also need to brace for sticker shock as home prices have risen as well. With housing inventory still struggling to reach a balanced supply, the remaining home sellers on the market are asking for more. 

In the four weeks ending October 1st, the median sale price for U.S. homes overshot last year’s prices by 2.9% at approximately $371,000, according to Redfin’s latest report. The asking price for those homes was even higher at almost $390,000 — a 4.6% increase from 2022. So while high rates are deterring many buyers, the inventory crunch is helping inflate the prices of homes hitting the market and making it more expensive than ever to purchase a home. 

Redfin’s report also found that monthly mortgage payments are at the highest recorded level. During the reporting period ending October 1st, the median monthly mortgage payment was $2,710 — up by 10% from last year.  

Use our tool, in partnership with Bankrate, to compare mortgage rates from different lenders.

Inventory inching higher

Although housing inventory has been slow to catch up with demand, there was a recent bump in the supply. September’s additions to the housing market created the highest number of months in supply since March. Typically the benchmark is four-to-five months of supply, and currently, we’re at 3.3 months. Inventory still isn’t ideal for potential buyers since sellers have the upper hand, but it’s an improvement nonetheless. 

Related Content

Seychelle Thomas
Contributing Writer

Seychelle is a seasoned financial professional turned personal finance writer. She’s passionate about empowering people to make smart financial decisions by combining 10 years of finance industry experience with solid research and a wealth of knowledge. Seychelle is also a Nav-certified credit and lending expert who has explored money topics such as debt consolidation, budgeting, credit, and lending in her work for publications including GOBankingRates, LendEDU, and Credible.