The recent surge in mortgage rates is likely forcing cash-strapped buyers in many markets to target smaller, more affordable homes, according to the latest report from real estate firm Redfin released Wednesday.
The median size of homes affordable on a $3,000 monthly budget has plunged by at least 100 square feet in 29 of the 50 most populous US metro areas, according to Redfin’s calculations.
That figure assumes a 20% down payment and the current 6.7% mortgage rate — which has more than doubled since January.
“For buyers who need a home right now — and can still afford it — compromise is the name of the game,” said Redfin senior economist Sheharyar Bokhari.
“Some buyers will choose to sacrifice on location or move further away from the city center so they can get the space they want, while others will settle on a smaller home in their ideal location,” Bokhari added.
Home affordability has plummeted in recent months as buyers face various budgetary challenges, including overheated pandemic-era home prices, the highest mortgage rates since the Great Recession and decades-high inflation.
Demand has cooled to the point that home prices have begun to fall in many markets — though they are still significantly higher than they were even last year. Redfin economists noted that low inventory levels have kept prices from falling below their year-ago peaks.
Of the top 50 metro areas, six markets currently have a projected affordable home size of less than 1,000 square feet — including the New York metro area.
The downsizing trend is most notable in the housing market of San Diego, California, where the theoretical size of an affordable home as plunged by 435 square feet over the last year.
The average San Diego homebuyer would cough up more than $5,000 in their monthly mortgage payment, up from the approximately $3,500 payment they would have had last year on a median-price home.
“That means buyers need to search for cheaper homes, which typically translates to smaller ones,” Redfin added in a blog post.
The Newark, NJ metro area ranked second with a decline of 431 square feet, followed by Nassau County, NY at 412 square feet, Denver, Colo. at 362 square feet and Portland, Ore. At 296 square feet.
Redfin based its calculations on median list prices for homes on sale, mortgage rates and available housing inventory on Sept. 29 of this year compared to one year earlier.
The housing slowdown is apparent in the volume of mortgage applications, which fell to its slowest pace since 1997 this week, according to the Mortgage Bankers Association. Refinancing applications have plummeted to a 22-year low due to the sharp spike in mortgage rates.