How would a 1% increase effect housing prices / costs in a specific example?
There are 2 ways of looking at it.
Let’s look at the impact on a home buyer with an interest rate that increases a point, from 2.875% to 3.875%, on a $700k loan and an $875k purchase price.
– At 2.875% principal and interest is $2,904/month.
– At 3.875% principal and interest is $3,292/month.
– The difference is $388/month or $4,656/year.
This seems like an increase that someone in that price range could absorb, BUT let’s see what happens if the borrower sticks to their budget of $2,904/month for mortgage expenses.
The loan amount decreases to $618k and the corresponding price (80% mortgage) decreases to $773k.
This is more than $100k lower than the original price of $875k, which is significant to what that home buyer can afford.
While buyers in a competitive market may not think too much of paying an extra $388/month to get what they want, the impact on prices is pretty meaningful ($773k vs $875k in our example) for buyers sticking to budgets, so the long term effect should be to depress housing prices. This should motivate sellers to get to market sooner, while buyers, if market forces prevail, will pay the same each month for the same house at a lower price.
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3rd Generation Owner