According to a new report from Redfin, the steep increase in mortgage rates has cut at least 100 square feet from home searches. Homebuyers are opting for smaller homes to reduce their monthly mortgage costs. 

Buyers unwilling to sacrifice size are choosing more affordable locations—or making other compromises—to afford the homes they want. 

Meanwhile, buyers priced out of the market by mortgage rates face difficult choices, especially as rents continue to rise. 

“Compromise is the name of the game”

For buyers who can still qualify for a mortgage, many are forced to compromise with square footage or location to afford the home they want. 

With mortgage rates more than double what they were at the beginning of 2022—and home sale prices higher than they were a year ago—monthly mortgage payments have seen dramatic increases from earlier in the year. With mortgage rates expected to rise even more, Keeping Current Matters shows just how much it impacts buyers: 

KCM-mortgage-rates-table

The higher cost of buying a home is driving many to choose smaller homes or to give up their ideal location for one that’s more affordable. For some, both size and location are on the chopping block. 

Soaring mortgage rates are throwing a wrench into prospective buyers’ plans. Many would-be buyers are dropping out of the market because they can no longer afford the home they want, resulting in a dramatic dip in home sales. For buyers who need a home right now–and can still afford it–compromise is the name of the game. Some buyers will choose to sacrifice on location or move further away from the city center so they can get the space they want, while others will settle on a smaller home in their ideal location.

Sheharyar Bokhari

Redfin Chief Economist

Higher rates, smaller homes

According to Redfin’s study, higher mortgage rates have cut at least 100 square feet from homes in buyer searches in 29 of the 50 metros in their analysis. 

Redfin’s report analyzed the median square footage of homes affordable for buyers with a $3,000 housing budget, considering list prices, mortgage rates, and the supply of homes for sale for September 29, 2022, compared to September 30, 2021. 

In San Diego, rates around 6.7% have cut over 400 square feet from homes affordable to buyers with a $3,000 housing budget, dropping the average to 931. 

A year ago, with interest rates at around 3%, San Diego buyers with the same budget could purchase a home with 1,366 square feet. 

Newark, NJ, has seen the second-biggest drop in square footage. Newark buyers with a $3,000 housing budget can afford a home with 1,726 square feet, down from 2,156 feet one year ago. 

Rounding out the top five metros with the most significant drops in square footage: 

  • Nassau County, NY: 1,300 sq ft – down from 1,712
  • Denver, CO: 1,571 sq ft – down from 1,933
  • Portland, OR: 1,504 sq ft – down from 1,800

Today, the typical home affordable to buyers with a $3,000 monthly housing budget has less than 1,000 square feet in six of the metros in Redfin’s analysis:

  • San Diego, CA
  • San Jose, CA
  • Anaheim, CA
  • Oakland, CA
  • San Francisco, CA
  • New York, NY

Just a year ago, San Francisco would have been the only metro on that list. 

Since home sale prices and annual price growth vary by location, rising mortgage rates impact housing sizes and affordability differently from one metro to the next. The variety of homes available to buy also varies across metros and from one year to the next. 

Redfin-Median-square-footage-chart

More affordable locations

By now, we’ve run across several reports of buyers moving to more affordable locations to save money as interest rates and home sale prices rise. 

But even within metro areas, some buyers are sacrificing their ideal home location for one that better fits their means. Buyers unwilling to sacrifice square footage, especially if their families are growing, are considering alternative locations and giving up the convenience of living closer to their workplace. 

Obviously, proximity to work is not an issue for remote workers, but location takes on a greater significance for those who want to make at least a part-time appearance at the office. 

Making sacrifices for the homes they want

Buyers who can’t afford to sacrifice either size or location are looking at other ways to cut costs by sacrificing one or more of these:

  • Expensive renovations 
  • Cars (or expensive ones) 
  • Travel (hello, “staycation”)
  • Pricey wardrobe updates
  • Eating out (frequency or cost)

Forced to tighten their budgets while their mortgage payment swallows up more of their income, homebuyers are cutting costs in other ways, many choosing a leaner lifestyle. 

The silver lining

Higher mortgage rates have helped rebalance the housing market, lowering competition and giving buyers more options than before—along with a better shot at having their offers accepted

So, while some buyers opt for smaller homes or less ideal locations, they still stand a better chance of getting a home that ticks all the most important boxes. 

Buyers who have been priced out of the market are in a more frustrating situation, especially if they’re waiting for rates to go down. 

As an agent, you’re better positioned to help would-be buyers in your area explore the options they still have, along with steps they can take to get approved and find a house they’ll love. 

What can you do to help?

For buyers intent on buying the homes they want (as long as they can get approved for the loan they need), collect information on resources in your community that can help them cut costs in other ways and get the most value from their homes. 

For buyers opting for more affordable neighborhoods, collect information on their chosen areas and keep them up to date on their preferred locations, especially if they’ve expressed their intention of moving when the time is right. 

For those choosing smaller homes to save money, share information on ways they can make the most of the space they have, along with anything that could help them increase the value of their homes without going over budget. 

Be the resource your clients need to live well in the current market, wherever they choose to live.