House Prices Tied to Mortgage Rates

Jun 30, 2022 | Finconomics 101

Summary: Mortgage rates recently doubled from around 3% to 6% as we recently discussed in our last post. This has real-world consequences as evident in this chart with the monthly payments increasing +42% to almost $1,800/month on a 30-year mortgage for a $300,000 loan. That’s an additional $6,400 per year in payments for a homeowner, assuming they can afford it! How does this impact home prices? If a buyer can only afford to pay $1,265 per month, to begin with, then the maximum mortgage they can afford now will be $210,000 at 6% (as opposed to $300,000 at 3%). Assuming the buyer had saved up a $75,000 down payment for a 3% $300,000 mortgage (25% down), their original price target to buy a house would have been $375,000. However, with mortgage rates at 6%, the buyer now can only afford a $285,000 house with a $75,000 down payment. That represents a -24% drop in purchasing power for the home buyer. This also represents downward pressure on house prices as buyers can afford less.

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