Mortgage Rates Highest in 2 1/2 Years... What Happens to California Real Estate Now?

Mortgage rates have been creeping up slowly and are now at the highest leveles since the summer of 2003. Here is some mortgage rate data from Freddie Mac to review. Part of the increases in mortgage rates is the fear of inflation and the rising yields on the 10yr and 30yr treasury bonds to which mortgage rates have a loose relationship with.

As I have mentioned and charted on a previous post, there is an inverted relationship between mortgage rates and real estate prices.

If mortgage rates continue to increase, real estate prices will come down. Here is a very simplistic overview of the impact of mortgage rates and home prices:

$500,000 loan interest only at 5.5% = $2520.83
Income needed to qualify based on 28% income to debt ratio*: $9,002

$500,000 loan, 30 yr fully amortized 5.5% = $2,838.95
Income needed to qualify based on 28% income to debt ratio*: $10,135

$500,000 loan, 30 yr fully amortized 6.5% = $3,160.34
Income needed to qualify based on 28% income to debt ratio*: $11,285

So assuming someone was looking at real estate and their income is $9,002 and they were originally looking at a $500,000 loan to buy a home, now mortgage rates are up and using the same income to debt ratio this person now only qualifies for a 30 year fully amortized mortgage at 6.5% for the amount of: $398,734.

That is over a 20% difference less in loan amount that this same buyer now qualifies for.

What do you feel a home buyer facing this situation will do? Stop looking? Get creative financing? Stretch themselves?

Give us your feedback as to what the impact will most likely be.