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Homebuyers’ purchasing power hit a low in October 2022, when the home price afforded by a $3,000 monthly payment was only $560,000, down from $865,000 in January 2022.
However, that purchasing power had a boost in recent months, according to a new Zillow report, which should have homebuyers feeling a bit more hopeful as the spring market approaches.
As mortgage rates have dropped from a roughly 7 percent peak, buyers can now buy homes about 84 square feet larger than those they could purchase in October with a $3,000 payment. And the home value associated with this payment is now up about $60,000 since October as well. These figures are all based on a home purchased with a 20 percent down payment and a 30-year fixed mortgage rate.
“Mortgage rates have a huge impact on the types of homes buyers are able to afford,” Zillow Economic Data Analyst Anushna Prakash said in the report. “Rates that doubled over the past year carved an extra bedroom or office space off of homes at the national level, though the sting has lessened in recent weeks. Buyers in more affordable hot markets are still getting solid bang for their buck, despite losing a lot of purchasing power.”
In the last year, a buyer’s purchasing power has been impacted in widely different ways depending on the specific market. Over the course of 2022, a buyer in Hartford, Connecticut, saw a drop of 1,200 square feet in what a monthly payment of $3,000 can buy. Similarly, buyers in Indianapolis and Cleveland also saw cuts of over 1,000 square feet in terms of what they can get with a $3,000 monthly payment.
However, buyers in San Francisco with a $3,000 monthly payment only lost 166 square feet over the course of the year.
“Homes in less expensive markets have a larger footprint to begin with, and therefore, had farther to fall as climbing mortgage rates applied pressure to buyers’ wallets,” Zillow’s report reads. “As costs rose in 2022, there were more buyers competing in those markets than in their more expensive counterparts.”
Since bottoming out in October, homebuyers have gained the most purchasing power on a $3,000 monthly payment in Salt Lake City (365 square feet), Minneapolis (357 square feet), Memphis (346 square feet) and Denver (340 square feet).
In this new economic landscape of higher mortgage rates, Zillow notes in its report that homebuyers can prepare now for the spring season by improving their credit as much as possible to obtain lower mortgage rates.
A borrower with an “excellent” credit score between 760 and 850 can qualify for a 30-year fixed-rate mortgage at a 6.0 percent interest rate, according to FICO’s Loan Savings Calculator. In contrast, someone with a “fair” credit score between 620 and 639 would only qualify for a 7.58 percent rate, which would equal a $348 difference in monthly mortgage payments, or $125,431 in interest over the life of a loan, based on the price of a typical U.S. house at $329,542 as calculated by the Zillow Home Value Index.