The rate effect on prices

With the end of the Fed MBS purchase program the interest rate is expected to rise between .5% and 1.5% depending on which "expert" is flapping his lips. But what will that mean to prices? Let's face it, nearly every buyer is buying at their high end. Very few buyers are conservative. So what would a 1% rise in rates mean to the average buyer?

Lets say our average buyer is looking at a house and needs a $300k loan. If the interest rate goes from 5% to 6% the payment on that house would increase about $190/mo. That does not sound like a huge difference. However the buyer has to qualify for that additional $190/mo. With a 31% DTI requirement that means you need to make another $610 a month in order to qualify for that payment increase. If you wanted to keep your payment the same the loan would need to be for $268k instead of $300k. So our hypothetical buyer can afford $32k more house with a 5% interest rate versus a 6% rate. And lets not forget that even a 6% interest rate is much lower than the long term average (The long term average is closer to 8%).