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Homebuyers might have to shrink their budgets next year

MarketWatch logo MarketWatch 12/28/2018 Jacob Passy

The U.S. housing market might be cooling off, but that doesn’t mean prospective buyers will catch a break.

Rising interest rates are seriously reducing Americans’ home buying power, according to a new analysis from real estate company Zillow. Based on the principle that a household should spend no more than one-third of its income on housing-related costs, a household earning the national median income in January 2018 could have afforded to buy a $393,700 home. Now, that same household could only afford a $373,000 home, if they wanted to keep their housing-related expenses at or below a third of their monthly income. In that time, mortgage rates have risen from around 4.15% to 4.63%.

All told, households earning the national median income can only afford 56.5% of the homes up for sale nationwide before spending more than a third of their take-home pay on housing.

With rates only expected to rise in 2019, affordability will continue to shrink. If the interest rate on a 30-year mortgage were to increase to 6%, a household earning the median salary would only be able to afford a home worth $319,200. Some 50,000 homes across the U.S. would therefore be out of reach to these households.

In some of the country’s most expensive housing markets, the affordability constraints caused by rising mortgage rates would be even more pronounced. Were mortgage rates to hit 6%, buyers making the median salary in San Jose, Calif., would need to look for homes that were $102,100 less expensive than what they could consider now.

Related video: The 5 Best States for First-Time Homebuyers (provided by GoBankingRates)


Homebuyers aren’t the only ones who will feel the pinch because of this situation. Home sellers may be forced to consider lowering asking prices in such a scenario if demand were to dissipate. And renters may see the cost of housing increase as more people choose to wait on the sidelines of the housing market.

Nevertheless, housing experts advised caution when it comes to basing the choice to buy a home on market fluctuations. “While it’s certainly important to keep track of home values and interest rates and plan your budget accordingly, buyers shouldn’t base their decisions on those moving targets,” Zillow senior economist Aaron Terrazas said in the report. “In the end, the best time to buy a home is always when the time is right for an individual buyer — often when they’re financially ready, when they’re relocating to a new area or a major life event requires them to upsize or downsize.”


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