Higher mortgage rates dealt massive damage to home buyers’ purchasing power last year, but affordability is trending up as we head into home shopping season, a new Zillow analysis shows.

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In Phoenix, what a buyer could afford with a $3,000-a-month mortgage has recovered by 287 square feet since mortgage rates peaked in October. It’s still 471 square feet smaller than last year.

Shoppers should improve their credit as much as possible to score the lowest mortgage rate. Nationally, the difference between “excellent” and “fair” credit scores can equate to a $348 difference in monthly mortgage payments and nearly $125,431 in interest over the life of a loan.

Home buyers purchasing power

“Mortgage rates have a huge impact on the types of homes buyers are able to afford. 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,” said Anushna Prakash, economic data analyst at Zillow. “Buyers in more affordable hot markets are still getting solid bang for their buck, despite losing a lot of purchasing power.”

Typical home value at a standing $3,000 monthly mortgage payment, based on weekly mortgage rates for a 30-year fixed-rate loan and using a 20% down payment

The annual decline is more pronounced in some markets. Hartford saw the largest drop in what $3,000 per month can buy in 2022, losing 1,200 square feet. Buyers in Indianapolis and Cleveland both lost out on more than 1,000 square feet in the last year. Cleveland and Kansas City are among the top 10 metros for home size at this price point and are among Zillow’s 10 hottest markets for 2023.

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. As costs rose in 2022, there were more buyers competing in those markets than in their more expensive counterparts.

On the other hand, $3,000 per month has always gotten a buyer less space in pricey markets, but their floor plans are shrinking all the same. In San Jose it will buy a 1,052-square-foot home, down from 1,268 square feet last year. Los Angeles, San Diego and San Francisco are close behind, with square footage for each below 1,400 square feet.

Although affordability is still a major challenge, buying power for home shoppers has rebounded in recent months. Since bottoming out in October, home size for a $3,000 payment has increased the most in Salt Lake City (365 square feet), Minneapolis (357), Memphis (346) and Denver (340).

Heading into the home shopping season, shoppers should prepare by improving their credit as much as possible in order to score the best mortgage rate. Even a small rate drop can save tens of thousands of dollars over the life of a loan. A borrower with an “excellent” credit score — between 760 and 850 — can qualify for a 30-year fixed-rate mortgage with a 6.0% interest rate. For the same loan, a similar borrower with a “fair” credit score — between 620 and 639 — qualifies for a 7.58% rate. This equates to a $348 difference in monthly mortgage payments and nearly $125,431 in interest over the life of a 30-year fixed loan, based on the current price of a typical U.S. home ($329,542).