What a 1% Rate Hike Does to the Price of a Minneapolis Duplex

This morning I saw a headline speculating we were headed toward 8% mortgage rates.

While we’re not there yet, mortgage rates just climbed to a three-year high. On October 1, Freddie Mac’s weekly survey put the 30-year fixed at 7.28%; nearly a full point above where it sat a year ago at 6.34%.

While Minneapolis and St Paul duplex buyers always want to know the price of a property, their most urgent question is about the size of the payment. A lender approves a buyer for a monthly number, and the price they can pay is whatever loan that number supports. When rates rise, the same payment buys less house.

Here’s a clean example.

As I’ve said before, a 1% increase in the mortgage interest rate on a $400,000 loan raises payments by $4000 per year. That, in turn, increases the monthly payment by $333.33 per month.

So what does one percentage point actually do to the price of a duplex?

If the buyer’s budget can’t stretch to accommodate the increased payment, the amount of the loan they qualify for by necessity has to go down. So a 7.28% rate only supports a loan of about $348,000, which works out to a purchase price around $361,000. One point on the rate just shaved roughly $39,000, or close to 10%, off what that buyer can pay. The percentage holds whether you’re putting 3.5% down or 25% down. The rule of thumb: every one-point rate increase cuts purchasing power by roughly 10%.

If an investor buys with 25% down, the math looks a little different but lands in the same place. On a $300,000 loan, that one point adds about $200 a month, or $2,400 a year, which comes straight out of cash flow. The rents didn’t change. The taxes didn’t change. Only the cost of the debt did. If a deal penciled at break even last year, it’s underwater now unless the price comes down. Keep in mind investor loans typically price above the average, so your real rate is likely higher than the headline number.

Prices don’t automatically drop overnight. What you usually see first is longer days on market, more price reductions, and more seller concessions like rate buydowns, rather than a clean 10% drop in list prices.

Buyers should get preapproved at today’s rate and run numbers on the payment, not the list price. Seller-paid buydowns (on rates) can be worth more to you than a price cut. Sellers should price for the buyer pool that exists now, not the one from a year ago. And if you’re a house hacker, remember the rent from the other unit is doing more of the heavy lifting than ever. That’s still the best hedge against high rates I know of.