In general, as interest rates rise, the homebuyer loses about 3% of purchasing power for every .25% in interest rate increase.


Duane Duggan

Duane Duggan, Realtor and Author RE/MAX of Boulder

Today’s market is tough on first time buyers. The inventory of homes and condos purchased by first-time buyers continues to be low, and along with inflation, home prices are being pushed upward in most markets. This is reflected in data from the National Association of REALTORS® 2022 Survey of Homebuyers and Sellers showing that 34% of homebuyers were first-time buyers. That percentage is likely to drop in the second half of 2022 and into 2023 due to rising interest rates and continued price appreciation.

During inflationary times, such as what we’re experiencing now, there is pressure in the economy for interest rates to rise to curb inflation. In general, as interest rates rise, the homebuyer loses about 3% of purchasing power for every .25% in interest rate increase. Buyers are then forced to choose a smaller, less expensive home, or wait until they get a raise or save more for a down payment. It is very tough to out-save an appreciating market or get a raise in time, so most will either buy the smaller place or step out of the market.

As an example, on a $400,000 loan at 3.86%, the principal and interest payment are $1,877 and increase to $2,094 at 4.78%. At 6% the payment increases to $2,398. Monthly income requirements increase from approximately $4,000 a month at 3.86% to approximately $5,100 a month at 6%.The exact income required depends on the overall monthly debt.

In addition to interest rates increasing, first-time buyers face yet another issue. As prices have increased, the conforming loan limits have increased, but not enough to keep pace with Boulder’s home price appreciation. In Boulder County in 2022, the FNMA loan limit is $747,500. 3% down loans are available on homes that are less than the $747,500 mark. According to the median home price in Boulder is $1.1 million. This leads to a large gap, creating a down payment requirement that exceeds the ability of most first-time buyers.

Now that interest rates are rising, will home prices decline to balance out the purchasing power? Looking at historical evidence, it shows that sharply rising mortgage rates tend to slow home price appreciation and affect market activity. However, nominal price appreciation remains positive. During previous times when interest rates increased, we never had such a housing shortage. Therefore, even though housing affordability has been reduced, home prices are unlikely to decline. As a result, affordability challenges are likely to continue.

When interest rates are on an upward trend, buyers start to get nervous and this creates a rush in the marketplace. Even with modest increases, interest rates continue to be very reasonable, relatively speaking. I remember in the 1980s when mortgage rates rose to 16%! Hopefully, most buyers will still be able to make their home buying decision because they like the home, not because they are pressured by interest rates.

By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder since 1982. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail [email protected], call 303.441.5611 or visit