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How *should* house prices adjust given a change in interest rate?


Active member

This exercise is to answer a few oversimplified questions.

1)  How much does a buyer need to adjust their price to have the same house payment when interest rates go from 3% to 7%?

2)  If the buyer from #1 does not adjust their house price and accepts a borrowing cost increase from 3% to 7%, what price would they need to purchase with a 3% borrowing cost to have the same house payment as their "new" 7% house payment?

I assumed
1.05% property tax rate
$225 HOA
0.10% insurance cost as a % of purchase price
$2,000,000 price.

I also had the hypothetical buyer put 20%, 50%, and 75% down in an effort to represent different types of possible home buyers.

The results for #1:  the 20%, 50%, and 75% down payment, respectively, are -$625,000 (-31%), -$575,000 (29%), and -$450,000 (23%)

In plain language, if a buyer was planning to buy a $2M house @3%, they would need to adjust their target purchase prices by those amounts to achieve the same house payment with a 7% borrowing cost.

The results for #2, for the 20%, 50%, and 75% down payment, respectively, are +$890,000 (45%), +$775,000 (39%), and $600,000 (30%).

In plain language, if a buyer was planning to buy a $2M house @7%, they would need to adjust their target purchase prices by those amounts to achieve the same house payment at a 3% borrowing cost.

You're welcome to download the worksheet and plug in your own assumptions.  It's oversimplified and only meant to be a general illustration.

I found a few results interesting:
(1) Even an excessively large down payment (75%) still results in a required -$450,000 (23%) decrease in target house price to achieve the same house payment with a 3% and 7% borrowing cost.

(2) The range of carrying cost increases when rates go from 3% to 7% for the three hypothetical buyers are 29% to 44% in % terms.  I didn't expect the 75% down payment to change much.  It does it % terms, but not much in $ terms.

(3) A buyer who is comfortable with a $2M house at 7% borrowing could pay a 30% to 45% higher price at 3% borrowing cost

Final thoughts:
(1) A buyer who is house payment sensitive can afford a surprisingly lot (well, surprising to me at least) less house now now that rates are hovering around 7% vs when they were 3%

(2) Local prices do not seem to have adjusted to reflect what buyers in January 2022 vs today can afford.  There's probably many reasons for this, such as non price sensitive all cash buyers who are providing price support, buyers who need to buy who have lowered their budgets/requirements, and sellers who are unwilling to accept that buyers willing to pay Q1/Q2 2022 prices are all but gone.

(3) Buying at today's prices, which arguably do not fully reflect today's borrowing costs, could be a money losing proposition (realized or unrealized depending on when the sale is) until rates come down.  Only if/when rates come down (and/or real incomes rise) can price sensitive buyers raise their purchase budgets.

(4)  To add another variable to this over simplified analysis, real incomes have declined roughly 2-3% in the last year depending on how you measure it (yes, nominal incomes have risen, but those gains were more than offset by inflation).  https://fred.stlouisfed.org/series/RPI https://fred.stlouisfed.org/series/LES1252881600Q This would have additional downward pressure on a payment sensitive buyer's affordability.



Well-known member
Just one thing:

0.10% insurance cost as a % of purchase price

That's completely wrong.

Insurance cost has nothing to do with purchase price. It depends completely on replacement costs. Square footage matters because of materials.

The insurance for my new home, $1.684M, is about $600 a year, with $5000 deductible, with Mercury. I actually asked the insurance agent about this and that's what he told me. He said that if I wanted more coverage, I could take pictures of all the upgrades that I would want to include in the case of a total loss and they had to rebuild the home.

I actually paid more for the Eastvale home, about $800 a year, because it's 3309 sq ft. My Irvine home is 2606 sq ft.


Well-known member
Also, as the purchase price goes lower so does the property tax.  Keep in mind that almost all of Irvine buyers are very conservative in terms of the purchase price of the home versus what they can borrow up to.  Most of my Irvine buyers purchase a home 20-40% below their maximum purchase price based upon their loan pre-approval.  The result may be that these same buyers now buy 10-30% below their maximum purchase price.


Active member
$2k per year to insure a $2M house might be on the high end, but the big picture stays the same when it's changed to 0.05% or lower.  You're welcome to modify a copy of the file to test it.

The worksheet adjusts for the change in property tax dollars as purchase price changes.

The only part that needs to be manually keyed in is the price in the "hold payment constant" section.