Yes, Interest Rates are having a huge effect on Price…

Minnesota Real Estate Investors Association, Inc.


Everyone knows that as interest rates rise, real estate prices drop.  It is only natural.  If the current interest rate is 4% on a $300,000 loan, the monthly PI (Principle & Interest) payment is $1,432.25.  If the interest rate goes up to 7% and the average buyer can only afford a monthly payment of $1,432.25, then the maximum amount they can borrow goes down to $215,277.40.

This is affectively what has happened over the past year and a half, so why have prices continued to climb?  That’s a great question and can be explained by the extremely low inventory levels.  The level of inventory has been so low for so long that the principles of supply and demand have caused prices to increase dramatically. 

In other words, if interest rates hadn’t risen so much so fast, the average loan balance may have risen to $565,000.  That is what the borrowers could afford based on the current average monthly PI payment of $2,700 and an interest rate of only 4%.

The following chart shows the affect interest rates have on a borrowers ability to pay over the past 18 months.

Loan Balance Interest Rate Monthly PI Payment  
$300,000.00 4.00% $1,432.25 March 2022 Interest Rate
$215,278.01 7.00% $1,432.25 Mortgage Balance if Monthly Payment stayed the same
$405,830.43 7.00% $2,700.00 October  2023 Interest Rates
$565,545.35 4.00% $2,700.00 Mortgage Balance if Interest Rates stayed the same




gamedaylady1960@gmail.comVery insightful post on interest rates and real estate pricing = thanks for sharing this!

Joey Slobotnik11/20/2023

Mike@MassRealEstate.netIt's actually even worse, that your Buying power is reduced, because your Front and Back-end ratios, that qualify you for a loan are higher. Lenders use the PITI in your ratios, not just PI, that is Principal, Interest, TAXES & INSURANCE. So whose Taxes & Insurance have gone down? No one I know. By the Bye, are you seeing a slowdown?

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