The housing market keeps getting tougher for buyers. With the average mortgage rate nearing 7% and home prices still in the stratosphere, homebuyers are losing purchasing power. But more than that, they are also losing living space. And three Metro Phoenix cities are among the Top 10 for biggest loss in home purchasing power.
Homebuyers in America’s 100 largest cities can no longer afford the amount of space that they could buy just one year ago: The average buyer lost the equivalent of 1 to 9 bedrooms due to increasing home prices and interest rates.
The amount of space the average homebuyer could afford in 2021 and what they can afford right now are two very different things. When the interest rate was hovering around 3%, the pain of soaring home prices was just a dull ache compared to the major burden it has become. Now, with rates crossing the psychological barrier of 7% (a level not seen in more than two decades) the consequences for homebuyers are crushing, as the latest Point2 analysis showed.
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Here are some highlights of the analysis:
• Aggressive rate hikes (after the latest increase, the average mortgage rate hovers around 7%), coupled with sky-high home prices mean buyers are bleeding money. But, aside from losing purchasing power, homebuyers — and especially post-pandemic homebuyers — are also losing what they wanted the most: More living space.
• Translating the losses in purchasing power into square footage reveals the saddest story: In just a few months, buyers in the 100 largest cities lost between 92 and a staggering 1,140 square feet of space.
• Given that the average size of a bedroom in the U.S. is 132 square feet, a simple calculation reveals that those losses represent the equivalent of 1 to nearly 9 bedrooms.
• Buyers in the 26 most affected cities lost the equivalent of 5 to 9 bedrooms worth of space.
• At the other end of the spectrum, buyers in 9 cities lost approximately 2 bedrooms or less. This may sound like good news, but in crammed urban hubs like New York, San Francisco, and Los Angeles, 1 or 2 bedrooms can make a world of difference.
• Buyers in San Jose, CA also lost more than $200,000 in purchasing power, while home seekers in 8 other cities lost between $150,000 and $200,000 in buying power following the latest rate increase.
• With affordability eroding, the homes that cash-strapped buyers can choose from are disappearing: In Anaheim, Los Angeles and Irvine, the share of homes within the average buyer’s budget is virtually zero. And, in 41 other cities it represents less than 10% of the total homes for sale.
Biggest Space & Money Losses: Fort Wayne, IN Buyers Lose Equivalent of 9 Bedrooms
Potential buyers in 60 other cities lost 500 to 1,000 square feet, or approximately 4 to 8 bedrooms
Although home size in the U.S had been on an upward trend since 1973, the pandemic really made everyone hungrier for space than ever. In that respect, American homebuyers really have been fortunate, as the U.S. has some of the most spacious homes in the world.
But this advantage of U.S. homes is quickly becoming a massive drawback: With sky-high home prices and rising mortgage rates, big homes are becoming untouchable.
But, if losing purchasing power sounds like a far-removed economic term, losing living space puts things into a totally different light for home seekers. That’s because it’s becoming increasingly clear that, under the new circumstances, buyers need to give up more and more of their space expectations in order to find something affordable.
And, no prospective homebuyers have given up more than Fort Wayne buyers: In 2021, a home seeker earning the median income in this Indiana city could afford to buy 3,035 square feet (assuming a 20% down payment and a 3%, 30-year, fixed-rate mortgage). But now, with interest rates hovering around 7%, that same buyer can only afford a much more modest 1,896 square feet of living space. Our analysis showed that Fort Wayne buyers lost 1,140 square feet in just a few months, which translates to a staggering nine bedrooms.
Wichita, KS, and Chesapeake, VA, followed suit: Buyers here lost 990 and 971 square feet, respectively. That translates to a no-less-depressing seven and eight bedrooms. Similarly, home seekers in 23 other large cities lost the equivalent of five to seven bedrooms.
However, because home prices and the price per square foot vary from city to city and median incomes are also very different, the buyers who lost the most space were not necessarily the buyers who lost the most in terms of buying power. Rather, that infamous list was topped by Fremont, CA: In 2021, homebuyers here could afford homes worth up to $893,390. Now, the average home seeker looking for an affordable home in Fremont would need to find one that costs around $650,269.
Fremont was followed by nine other cities where potential homebuyers lost between $150,000 and $200,000 in buying power in just one year: San Jose, CA; San Francisco, CA; Arlington, VA; Gilbert, AZ; Irvine, CA; Seattle, WA; Scottsdale, AZ; and Chandler, AZ; and Washington, D.C. What’s more, buyers in 33 other large cities lost between $100,000 and $150,000 in buying power compared to 2021.
Smallest Space & Money Losses: New York Buyers Lose Slightly Less Than 1 Average Bedroom Worth of Space
Potential buyers in 28 other large cities lost 100 to 400 square feet of living space, or the equivalent of 1 to 3 bedrooms
Although losing the least amount of affordable space of the 100 largest cities in the U.S. sounds like good news, no New Yorker or San Franciscan is going to be happy about it.
Losing 92 square feet of living space might not even phase a buyer in Texas, where homes are sprawling and abundant living space is almost a given. But, in a high-density, space-strapped place like NYC, that number is a disaster.
Aside from New York, the only other large U.S. cities where buyers lost the equivalent of approximately one bedroom were San Francisco, CA; New Orleans, LA and Boston, MA. In fact, Washington, D.C. — the 10th city on this list — was the only city where buyers lost two full, average-sized bedrooms in just one year due to the climbing prices and mortgage rates. The other nine cities in this category “only” lost the equivalent of one or slightly less than two bedrooms.
Among the top 10 cities that lost the least space compared to last year, California cities Oakland, Los Angeles, and Long Beach, also stood out as high-density business hubs where space comes at a premium.
But, which cities lost the least in terms of buying power? Make no mistake, just like any of the other U.S. cities, these areas were also affected by increasing home prices, rising rates, and incomes that can’t quite keep up. Yet, due to a constellation of slightly more favorable factors, buyers in eight large cities lost less than $50,000 in purchasing power: Cleveland; Buffalo, NY; Detroit; Newark, NJ; Milwaukee; Toledo, OH; Cincinnati; and El Paso, TX. Rounding off the top 10 are Laredo, TX and Memphis, TN. Buyers here lost $53,713 and $57,646, respectively.
Inventory of Affordable Homes in Freefall: 3 California Cities Have 0 Homes Priced Within Average Buyer’s Budget
In Anaheim, LA and Irvine, buyers would find no homes within their budget. Meanwhile, affordable inventory in 41 other cities represented less than 10% of total homes for sale.
The fact that affordable homes are almost extinct no longer surprises anyone. Whether it’s renters looking for a starter home or homebuyers looking for their forever home, finding a property that matches their budget would be nothing short of a small miracle — and it’s not for lack of trying.
Home seekers go out of their way to find homes that are within their budget, but that usually means they end up settling for a much smaller home, a home in a totally different location or both. More precisely, some of the challenges and issues plaguing developers and keeping buyers on the sidelines include ever-increasing costs of land, labor shortages, skyrocketing costs of building materials, supply chain issues and zoning restrictions.
