Analysts See Flattening Homebuyer Budgets a Sign of Strength and Weakness

Homebuyer budgets this year experienced their slowest growth since June 2020, according to real estate brokerage Redfin, rising by just .3 percent over the three-month period ending April 30.

The calculation is based on the average maximum budget set by Redfin.com users in their online home searches.

“Buyers are qualified to borrow less money because of rising rates, which means they’re searching for less expensive homes,” Fresno Redfin agent Dennis Rozadilla said in a release 

Declining budgets are a leading indicator that home-price growth has passed its peak and will slow in the coming months, Redfin said.

Fix or Flip Properties Affected, Too

Steve Ostad, principal of Real Quick Capital, tells GlobeSt.com that the homebuyer’s budget flattening can be accredited to the rapid HPA being experienced in many markets and the velocity of rising interest rates. 

“This will impact sectors such as fix and flip properties,” Ostad said. “With there being softened demand from homebuyers, investors will have the opportunity to step in and be more competitive in the market. 

“At the same time, first-time buyers have been getting priced out of the market, they may continue renting longer which will be a positive for the investor/rental market. Markets like fix and flip should remain strong as the market shifts more in the favor of buyers as it will allow them to opt for homes more recently renovated, updated, etc. 

“The flip side is, as market cools and budgets aren’t increasing at the pace they have been, investors will need to be careful and disciplined on properties and locations they chose to invest in and rehab budgets they implement.”

Tiny Growth ‘Incredibly Encouraging’

James McGrath, co-founder of NYC residential brokerage firm Yoreevo, tells GlobeSt.com that the 0.3% year-over-year rise is “incredibly encouraging and evidence of just how healthy the underlying demand for housing is.”

Mortgage rates have gone from ~3% to ~5% and are going to take another big step up after recent moves in the 10-year treasury (up to 3.44% Monday).

“A move from 3% to 5% that is a dramatic hit to buyers’ affordability – raising mortgage payments about 30% – so the fact that buyers haven’t reduced their budgets is an extremely strong validation that the housing market is on solid footing.”

He said that the loans that are being made are to strong buyers after a thorough underwriting process and budgets aren’t stretched.

“Usually, banks don’t want to go too much higher than a 40% debt to income ratio,” McGrath said. “If buyers were stretching and already at 40%, they would have to decrease their budgets (to offset the rise in mortgage rates). But if they were at 30%, the increase in mortgage rates certainly isn’t welcome but it can be absorbed.”

Budgets hit peak growth at a rate of 12.2% in April 2021, Redfin reported.