Interest rates have fundamentally changed how buyers approach the East Bay housing market, and understanding this shift is critical whether you're buying now or planning to buy soon. The jump from the historic lows of 2020 and 2021 to current rates around 6% and higher has reshaped buyer psychology, purchasing power, and market dynamics in ways that affect every aspect of real estate transactions.
I've watched this transformation happen in real time with my clients in Lafayette, Orinda, and Moraga. Buyers who were eager and aggressive two years ago are now cautious and calculated. People who could comfortably afford $2 million homes at 3% rates are now shopping in the $1.5 million range at 6% rates. And many potential buyers who locked in 2.75% mortgages are choosing to stay put rather than trade up to 6% or higher.
Let me walk you through exactly how interest rates are affecting buyer behavior and what it means for your situation.
The Real Cost of Rate Increases
Understanding what a 1% rate increase actually costs helps explain why buyer behavior has changed so dramatically.
Let's use a concrete example. You're buying a $1.5 million home with 20% down, financing $1.2 million. At 3% interest, your monthly principal and interest payment is approximately $5,060. At 4%, it jumps to $5,730, an increase of $670 per month or $8,040 annually. At 5%, you're paying $6,440 monthly, another $710 increase. At 6%, the payment becomes $7,195 monthly.
That's a $2,135 per month difference between 3% and 6% rates on the same loan amount. Over a year, that's $25,620 in additional housing costs. Over the 30 year life of the loan, you're paying roughly $769,000 more in total payments at 6% versus 3%.
Now consider this from a purchasing power perspective. If a buyer can afford a $7,000 monthly payment, at 3% they could finance $1.4 million. At 6%, that same $7,000 payment only supports a $1.17 million loan. That's a $230,000 reduction in purchasing power from rate increases alone.
This compression of purchasing power explains much of what we're seeing in the current market. Buyers haven't disappeared, they've just been forced into lower price ranges or out of the market entirely.
How Buyers Are Adapting
The buyers who are still active in the East Bay market have adjusted their strategies in several distinct ways.
Many are simply accepting the new rate reality and moving forward with purchases at current rates. They recognize that trying to time interest rates perfectly is difficult, and they'd rather buy the home they want now and potentially refinance later if rates drop. These buyers understand the "marry the house, date the rate" philosophy.
Others are increasing down payments to keep monthly payments manageable. Instead of putting 20% down, they're putting 30% or 40% down if they have the cash available. This reduces the loan amount and therefore the monthly payment, even at higher rates.
Some buyers are adjusting their expectations about home size, location, or condition to find properties at lower price points that work with their budget constraints. A buyer who was looking at $2 million homes at 3% might now be shopping at $1.6 million at 6% to keep the monthly payment similar.
The most frustrated group is the move up buyers who are locked into low rate mortgages from 2020 and 2021. Many of these families want larger homes or better locations, but the math of giving up a 2.75% mortgage for a 6% mortgage on a more expensive home is difficult to justify. Some are choosing to renovate their current homes instead. Others are waiting and hoping rates come down. A few are moving forward anyway because their life circumstances require it.
What This Means for Affordability
The affordability challenges created by higher rates are showing up differently across price ranges in Lamorinda.
Entry level homes from $1M to $1.4M are feeling the most pressure because buyers at this price point are often stretching to afford Lamorinda in the first place. Higher rates have pushed some of these buyers out of the market entirely or down to less expensive communities. This explains why entry level pricing has softened more than other segments.
Family homes from $1.4M to $2.5M are seeing reduced buyer pools but still moving when properly priced and presented. Buyers at this level often have more financial flexibility, either through higher incomes, larger down payments, or both. They're feeling the rate impact but can often absorb it.
Luxury properties above $2.5M are less sensitive to rate changes because wealthy buyers are more likely to pay cash or use portfolio loans with different rate structures. However, the luxury market has slowed somewhat as even affluent buyers become more cautious in uncertain economic times.
Strategies for Buyers Navigating Higher Rates
If you're buying in the current rate environment, several strategies can help you manage the impact.
Get pre approved early and understand exactly what you can afford at current rates. Don't base your budget on what you could have afforded at 3% rates. Work with your lender to understand the payment at today's rates and make sure you're comfortable with that number.
Consider adjustable rate mortgages if you're confident you'll refinance within a few years or if you don't plan to stay in the home long term. ARMs typically offer lower initial rates than 30 year fixed mortgages. A 5/1 or 7/1 ARM might start at 5% versus 6.5% for a fixed rate, saving significant money if rates do drop and you refinance before the adjustment period.
Buy down the rate if you have extra cash available. You can pay points upfront to reduce your interest rate. One point, equal to 1% of the loan amount, typically reduces your rate by 0.25%. On a $1.2 million loan, paying $12,000 in points might reduce your rate from 6.5% to 6.25%, saving roughly $180 monthly or $2,160 annually.
Focus on the home more than the rate. If you find the right property in the right location at a fair price, rates are somewhat secondary. You can always refinance if rates drop, but you can't refinance into a better location or a home you love more. This is why the "marry the house, date the rate" advice makes sense for many buyers.
Don't wait for perfect rate conditions. Rates might come down at some point, but they might also stay elevated for years. Meanwhile, home prices could rise as lower rates bring more buyers back into the market. Buying now at a higher rate with a lower price often works out better than waiting for lower rates and paying higher prices.
The Refinancing Reality
Many buyers are banking on refinancing when rates drop, and this can be a smart strategy if you understand the reality of how refinancing works.
Refinancing typically costs 2% to 3% of the loan amount in closing costs. On a $1.2 million loan, expect $24,000 to $36,000 in costs. You need the rate reduction to save enough monthly to justify these costs within a reasonable timeframe.
Most experts suggest refinancing makes sense if you can reduce your rate by at least 0.75% to 1%, though it depends on your specific situation and how long you plan to stay in the home.
You'll need the home to appraise at or above your loan amount when refinancing. If values have dropped, refinancing might not be possible without bringing cash to the table.
The key point is that refinancing is a real option if rates drop, but it's not free and not automatic. Factor the costs and requirements into your planning.
Moving Forward
Interest rates have fundamentally changed buyer behavior in the East Bay, creating challenges for affordability and purchasing power. But the market is still functioning. Homes are selling. Buyers are finding properties that work for their needs and budgets. The key is understanding the current rate environment and adjusting your strategy accordingly.
If you're navigating the East Bay market as a buyer and want to discuss how current rates affect your specific situation, let's talk. I work with excellent local lenders who can explain your options, and I can help you understand what's realistic in terms of homes and neighborhoods given current rate conditions. The rate environment isn't ideal, but success is absolutely possible with the right approach and realistic expectations.
-Kelly
