I recently had a conversation with new buyer clients, Beth and Eric. Last year, they moved to the DC area to start their dental practices. Now they are ready to purchase their first home.
Early in the conversation, Beth said something I am hearing a lot, “We need to reduce our price point because we don’t want to increase our monthly mortgage payment”.
They’re certainly not alone. Rising interest rates have caused many buyers to lose purchasing power.
Buyers shop for houses based on their price point. To get to that price point, they first determine the monthly payment they can afford, then they convert that payment into a price (see chart at right).
When interest rates increase, a buyer has two choices. Either keep the loan amount the same and increase the monthly payment, or keep the monthly payment the same and decrease the loan amount. This second option means that the buyer is choosing to borrow less, therefore spend less and is losing purchasing power.
It’s very similar to when people shop for a car. In order to keep the monthly payment at, say $500, they can extend the length of the loan or increase their down payment. With buying a home, it’s unusual to get a mortgage longer than 30 years and most people don’t have the extra cash to increase their downpayment. Therefore, if they don’t want to go up in payment, they need to go down in price.
Fortunately for Beth and Eric, it looks like there are still good options for them, and I am confident they will find a winner.
