How to Adjust Your Housing Budget with Rising Mortgage Rates

A house that you could have easily afforded last year may be well beyond your reach this summer. Thanks to a mixture of rising mortgage rates and demand for homes without inventory to keep up, the housing market has not been friendly to buyers in 2022.

Many Americans who are looking to buy a home may need to rethink their housing budgets, especially as mortgage rates continue to skyrocket.

Homes that were generally affordable before the housing boom may simply now be too expensive for the average American to fit into their budget.

What Has Happened to the Housing Market in the Last Year?

The economy has gone through some turbulent times throughout 2022. Inflation is dramatically on the rise, supply chains are still disrupted and everyday costs for Americans are reaching record highs.

This has been heavily felt in the housing market. As the post-pandemic economy started to swing upward, demands for new homes soared. But supply has taken some time to catch up. The result has been increasing housing prices and rising mortgage rates in what has been a very seller-friendly market.

According to a report from Freddie Mac, 30-year mortgage rates hit 5.51% in July, which is nearly double from the rate this time last year of 2.88%.

The combination of rising mortgage rates and scarcity of homes available has made buying a house flat out unaffordable for many Americans. Even modest homes have commanded high prices for much of 2022.

But, luckily for buyers, there are some signs that the market may finally be softening. According to an article from CNN, a few recent factors have suggested that things might be slowing down.

Mortgage applications are down, and more homes are entering the market every day. But it may be some time before the market looks anything like what it did before this surge.

Americans looking at buying a home soon will likely have to make some recalculations and hard decisions on their housing budget.

How to Adjust Your Housing Budget

There is a longstanding belief that you should not allot more than about 30% of your income to housing each year. The issue is that, with rising costs and mortgage rates, 30% of your income likely doesn’t go nearly as far as it did a year ago.

But if you are looking for a home right now, exceeding that figure could be dangerous. It’s important to not let the market dramatically influence your decisions. Buying a house that you can’t afford could cause problems.

The best step to figuring out how to adjust your housing budget amid rising prices is understanding exactly what you can afford. According to an article from the New York Times, one way to begin figuring this out is to create a spreadsheet or budget and map out all of your annual expenses that don’t relate to housing.

You also must be sure to include room for things like planning for retirement or paying off debt. Adding up all those factors and removing them from your income can give you a better understanding of how much you can really afford to spend on housing.

When adjusting your housing budget, it can also be risky to speculate. This means, when determining how much you can spend on housing, it could be problematic to base your budget on money you don’t have yet.

For example, it could be a risk to purchase a home based on expectations of a promotion or raise or some other new source of income within the next year.

This can be hazardous partly because things may not work out the way you are expecting, but also because inflation has shown in the last year that new income can be quickly outpaced by rising costs.

Given that there are some signs of the market softening, it may make sense to wait to buy a home as more affordable options become available.