The average US homebuyer has gained $40,000 in buying power in the last 3 months as mortgage rates cool

The average US homebuyer has gained $40,000 in buying power in the last 3 months as mortgage rates cool, per BI.

Homebuyers with a monthly mortgage budget of $3,000 now have the capacity to afford a $453,000 home, as per a recent analysis by Redfin. This increase in affordability is attributed to the recent decline in mortgage rates, bringing the cost of borrowing on a 30-year fixed mortgage to approximately 6.7%, according to Freddie Mac data.

Comparing to conditions in October, buyers now have an additional $40,000 in purchasing power. In October, with a $3,000 monthly budget, homebuyers could only afford a $416,000 home, given the mortgage rate of around 7.8%.

Redfin data indicates that the median home price in the U.S. is $363,000. With rates hovering around 6.7%, the typical homebuyer would pay $2,545 on their monthly mortgage payment, a reduction from the median monthly payment of $2,713 when mortgage rates were around 7.8%.

The consistent decline in mortgage borrowing costs in recent months is largely attributed to expectations that the Federal Reserve will commence trimming interest rates this year. Market expectations suggest the possibility of the Fed cutting interest rates around six times this year, according to the CME FedWatch tool. This optimistic outlook implies rates potentially falling below 4% by the end of the year. The Fed itself has indicated that it is considering three rate cuts this year.

Lower borrowing costs since the end of 2023 have brought relief to the U.S. housing market. Sales, which were stagnant last year, are now showing signs of increased activity, indicating improved affordability that is attracting more buyers and sellers to the market.

Redfin's chief economist, Daryl Fairweather, advises prospective buyers not to attempt to time interest rates before entering the housing market. Fairweather suggests that the days of low-single-digit mortgage rates are over, and attempting to time the market could be futile. Redfin predicts only a slight improvement in affordability in 2024 as rates ease, leading to a gradual return of buyers to the market. Home sales are expected to increase by 5% to 4.3 million in 2024, with home prices projected to fall by just 1% this year, according to previous estimates by the real estate listings site.