Affordability and Prices at Higher Rates

By Dave Fratello | August 8th, 2007
Let's open this one up for discussion, since there are plenty of readers here far more savvy in the ways of finance than your humble correspondent.

MBC was wondering something... if rates are up to stay (debatable!), how much might prices adjust to allow buyers to "turn back the clock" to earlier this year?

We made these assumptions and fed them into a mortgage-rate Univac online...
Home price: $2.0m
Down (20%): $400k
1st TD: $1.600m
The computer spat back:
30y fixed payments at...

6.5%: $10,118
7.5%: $11,187 (+$1,074)
8.5%: $12,303 (+$2,190)
Then we wondered, if a buyer has missed out on the chance at 6.5% rates, but still wants to pay right around $10k/mo. on the 1st, how much can that buyer now afford?
At 7.5%, the loan amt. for the 1st should be: $1.450m (-$150k)
At 8.5%, the 1st should be: $1.325m (-$275k)
So here, the buyer goes shopping for less-expensive homes, or the higher-priced homes drop 7-14% to keep the interest of the priced-out buyers.

This may be premature to consider, but what does prior experience suggest? Reactions to these assumptions or figures?

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