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Photo Illustration of a couple looking at a beautiful house with a for sale sign
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Homebuyers today are getting a lot less for their money: Someone with a $3,000 monthly budget now can afford to purchase a $450,000 home — versus a $510,000 property on the same budget a year ago.

The reason for the difference boils down to mortgage rates, which have a stranglehold on the real estate market right now. As long as they stay elevated, there's reason to believe that the housing inventory will stay depressed.

High rates have cost would-be homebuyers dearly. New data from real estate brokerage Redfin shows how high mortgage rates have been steadily robbing buyers of purchasing power while also trapping sellers in their current mortgages, leading to a dilemma in which sellers are loath to list and buyers are able to afford less.

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Mortgage rates, purchasing power and home supply

Redfin's new report chronicles the decline of purchasing power for U.S. homebuyers since July of last year. At that time, when mortgage rates averaged at about 5.3%, a homebuyer on a $3,000 monthly budget could have afforded a house priced at $510,000. At the current average mortgage rate of almost 7%, however, that same budget can only afford a $450,000 house.

This comes out to a $60,000 decline in purchasing power for homebuyers in just the last 12 months.

This drop in how much house a buyer can afford only becomes more severe when you compare the current situation to early in the pandemic, when mortgage rates were under 3%.

Potential sellers, too, are downtrodden by the high rates today, since many purchased their homes years ago and are paying mortgages in the range of 2.5% to 3% Putting one's house on the market now would mean giving this favorable rate up for one that's twice or even three times as high, making many would-be home sellers feel trapped.

This mortgage trap is one reason for the beleaguered housing inventory. Redfin uses "months of supply" as the metric to measure housing inventory — it's the amount of time it would take at the current sales pace to sell all available listed houses. The company says that during the four weeks ending July 9, there was only a 2.8-month supply of homes for sale, whereas it's between four and five months normally. Meanwhile, new listings are down 27% from July of 2022.

Home prices and home values keep rising

High mortgage rates continue to hurt the real estate market on all sides. Would-be sellers are reluctant to list their homes, while buyers are getting less for their money, with less of a selection to boot.

The fact that homes are only becoming more expensive makes for a bleaker picture. The value of the average American home is at an all-time high of $350,213. Unsurprisingly, the price of an average American home is at an all-time high as well. Data supplied to Money by real estate company Black Knight's Home Price Index shows that the average home is priced at $437,326 — barely within the $3,000 per month budget used by Redfin to gauge the loss in purchasing power.

In nearly half of the country's 50 largest real estate markets, homes are both valued and priced lower than they were in July of 2022. But, given that much of the country is generally trending up, those markets could very well reach new heights, too. All said, it's reasonable to expect these averages to rise even more before they fall.

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