The rapid acceleration of home price increases essentially wipes out the affordability and purchasing power gains due to historically low mortgage rates, according to a study released Thursday by Redfin.

The average 30-year fixed-rate mortgage was roughly 3 percent in July and August 2020, which meant a homebuyer could afford a $516,500 home on $2,500 per month with a 20 percent down payment in the typical market. In July 2019, the same homebuyer wanting to pay the same monthly cost could afford a $483,250 home when the average mortgage rate was 3.77 percent.

That $33,250 rise in purchasing power represents a 6.9 percent increase year over year. But over the same time period, home prices increase 8.2 percent, which is due to a combination of low mortgage rates and low inventory.

“Low mortgage rates are motivating many people to purchase a home, particularly those who want more space to work from home,” Redfin Chief Economist Daryl Fairweather said in a statement. “But because there hasn’t been an increase in the number of homes for sale since rates started dropping with the onset of the pandemic, many buyers end up competing for the same homes, driving up prices.”

“Those competing forces make the current market a wash for many buyers looking for single-family homes in competitive areas,” Fairweather added. “Buyers searching for condos can find a better deal, both on overall price and mortgage payments, because most condos are less competitive than single-family homes as people move out of densely populated urban areas.”

The supply shortage and ensuing increase in prices, means there are fewer affordable homes on the market than this time last year. In July 2020, 70.6 percent of homes were affordable on a $2,500 a month budget, down from 71.9 percent in July 2019.

Tightening supply is impacting different markets in myriad ways across the country. Salt Lake City, Kansas City, Austin and Boston all saw declines of greater than 3 percent in the number of homes for sale on a $2,500 monthly budget, year over year. Miami, Jacksonville, Columbus and Milwaukee experienced the biggest gains in supply, all reporting increases of at least 2 percent.

Overall, supply for all price ranges is down in 40 of 50 metro areas tracked by Redfin, according to a separate study released Thursday by Redfin. 

Baltimore, for example, saw the number of homes up for sale in July drop 20 percent year over year.

“There’s a perfect storm in the housing market right now,” said Jason Allen, Redfin’s market manager in Baltimore. “People are more comfortable staying in their homes; they’re investing in pools, offices and better backyards instead of moving.”

“But at the same time, there are suddenly a lot more people who want those amenities, so we’re seeing this huge wave of buyers,” Allen added. “We’re meeting far more clients who want to buy a home than sell a home.”

Email Patrick Kearns

Show Comments Hide Comments

Comments

Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
Success!
Thank you for subscribing to Morning Headlines.
Back to top
We're giving away 3 free ICLV tickets at Connect Now tomorrow. Register and attend live for your chance to win!REGISTER×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription