The $10K standoff: How inflation math can save your negotiation

My mortgage payment is $1,500 a month ($3,500 if you include taxes). That makes me one of those homeowners — the kind who locked in years ago and got a little older along the way.

A buyer financing a $1.5 million home in Austin, Texas, today is looking at about $10,734 a month, taxes included. Put the two of us on opposite sides of a deal and ask us to agree on a $10,000 repair credit, and we’ll be looking at that number from different planets.

Good luck.

We hear about inflation and interest rates constantly. Most of us know the headline version: rates up, prices down. But the inflation of the past few years is doing something to our transactions. It’s changing how buyers and sellers feel about money, and those feelings show up right when a negotiation stalls.

First, a quick lesson on the Fed and mortgage rates

Clients ask me all the time whether the Fed sets mortgage rates. Indirectly, is the short answer.

The bond market drives mortgage rates. The Fed has a dual mandate: low unemployment and stable prices. Inflation above the Fed’s target is, by definition, unstable prices. So bond traders watch the data and push the 10-year Treasury yield up before the Fed acts, pricing in the rate hikes they think are coming.

Why does that matter to your buyer? Mortgage rates usually sit about 1.5 to 2 points above the 10-year. When the 10-year moves, mortgage rates follow, often within days, whether or not the Fed has done anything yet.

Think of the bond market as the group that reviews the economy before the Fed even decides what to do. (Some of the sharpest people I worked with in finance were bond traders. They understand that mandate better than almost anyone.) This month the 10-year hit 5.25 percent, a 19-year high.

Why Austin prices didn’t fall by a third

Here’s the rule of thumb: A 1-point rise in mortgage rates takes roughly 10 percent off the price a buyer can pay for the same monthly payment. Eighty percent of buyers finance, and they make their pricing decisions based on the payment they can handle every month.

Here’s what that looks like. At 3.5 percent, $4,490 a month in principal and interest covers a $1 million loan. At 4.5 percent, that same $4,490 only covers about $886,000. Same buyer, same budget, about 11 percent less house.

Rates went from about 3.5 percent to over 7 percent. By payment math alone, Austin prices should have dropped something like 35 percent. They didn’t. Some areas came down 20 to 30 percent, and every neighborhood has its own story.

Why? Because many variables move prices, and one of them is inflation. We’ve had over 20 percent inflation in the U.S. since 2021. It likely cushioned owners from a much steeper correction.

Inflation pushes up wages, rents and what it costs to build a new house. As incomes catch up, buyers can stretch a little further, and an existing home looks better next to the price of new construction. Meanwhile, owners with fixed-rate mortgages quietly benefit: the dollars they owe the bank shrink in value every year.

So was Austin real estate still a hedge against inflation? Potentially.

The standoff: Why both sides are right

Here’s where it gets personal for our clients.

• The seller bought their home for $600,000 in 2010. They’re selling it for $1.5 million. Their last mortgage payment was $800 a month. Now the buyer wants $10,000 for some handyman items. That’s a full year of the seller’s old mortgage payments. Outrageous!
• The buyer is younger, earlier in their career and financing the same house at about $10,734 a month. They’re asking for less than one mortgage payment. Why are these sellers being so cheap?

Both of them are right.

The seller’s sense of money was set before 20 percent inflation. Many stopped working years ago, so their baseline never moved. The buyer’s baseline is today’s prices. And we humans are terrible at percentages. We judge $10,000 against how we spend money in everyday life, not against the price of the house.

Understanding this math is how we help our clients bridge the gap. Winning the negotiation can’t be the goal if they actually want to buy or sell. We say this all the time to buyers and sellers: The client gets to pick which variables they want to prioritize.

If you are a buyer who wants a very agreeable seller, we cannot shop in desirable areas, and we have to look for distressed situations. If you want to shop in a desirable area, then that is the variable we are prioritizing, not the reasonable seller.

What to tell your sellers

Show them the buyer’s payment. Do the math for them. An $11,000 monthly payment on a house our clients bought for $65,000 in the 1980s is sobering.

Put everything in percentages. It helps, I promise. $10,000 feels like a ton of money. On a $1.5 million home, it’s about 0.67 percent.

Think about the next best offer. If you say no and the buyer walks, you’re back on the market. Will the next offer, a few weeks from now, be $1.5 million? Or will you be dropping to $1,450,000 to drum up interest?

Count the opportunity cost. What will you do with that equity? A 10-year Treasury pays 5.25 percent right now. On $1.5 million, that’s about $78,750 a year, or roughly $6,560 a month.

If these buyers walk and you end up on the market one more month, then that $10,000 credit now would really only cost you about $3,440. In other words, saying no costs you about $6,560 in lost return, so the real difference is $10,000 minus $6,560.

What to tell your buyers

Show them the payment impact. At today’s rates, $10,000 moves a fully financed payment by about $66 a month.

Talk about appreciation. If you plan to own this home for 10 years or more, 2 percent appreciation on $1.5 million is $30,000 a year. You’d make that $10,000 back in about four months, so don’t walk away from the house because of it.

Be honest about unique homes. Remember the variables. If we’re shopping for the rare house on the great street, that’s the variable we’re prioritizing. There are ways to find agreeable sellers (I have ideas). They just rarely own the home everyone wants.

Our job is the whole math puzzle

We support our clients, and we also advise them. After 600+ transactions, we have a pretty good feel for how these standoffs end.

For sellers, that means showing them what their equity could be earning. For buyers, it means pointing out they’re about to skip the perfect house over two-thirds of 1 percent of the price.

Buyers and sellers do not get to the closing table by winning the negotiation. They close by remembering why they came to the table in the first place.