Home Real Estate Should You Wait Until Mortgage Rates Fall to Buy a Home? No, Here’s Why.

Should You Wait Until Mortgage Rates Fall to Buy a Home? No, Here’s Why.

by Ozva Admin

About the Author: nicole bachaud is a senior economist in Zillow’s economic research team.

House prices are starting to fall, but they are still not far from their peak. mortgage rates they are rising, from less than 3% last summer to a threatening 7% today.

Those numbers might make someone buying their first home want to hunker down and wait for the market to end. Maybe house prices will have an impact dressing, and bring some bargains. And if mortgage rates were historically low last year, why not wait for that cycle to return?

In truth, first time homebuyers can’t wait for this market. And not only that: if they can afford it, right now they are looking for the best opportunity they have had in several years to get a new house.

That may seem contradictory. After all, home values ​​have risen 41% since March 2020, and between that and the recent increase in mortgage rates, monthly payments on a typical home in the US have skyrocketed 73%. . That’s an extra $800 per month in places like Kansas City, and a whopping $3,390 per month in the Bay Area.

But remember this: As home prices soared during the pandemic, first-time buyers were not only struggling to keep up with rising down payments and monthly costs, they were also bidding against a slew of buyers. repeated that they were full of capital and inspired to move.

Now, rising interest rates have caused homeowners to reconsider. Why downsize if going from a 3% mortgage rate to 6.5% doesn’t help your monthly budget? Instead of upsizing, leveraging capital to pay for an addition could suddenly be more profitable.

As current owners crunch those numbers and decide to stay, the proportion of first-time buyers has bounced back from 37% to 45% in the last year. That rate is likely going up. Locked-in first-time buyers who can still afford to bid and close are in a better position now than they have been in months. Not only are new buyers less likely to face bidding wars against all or most cash offers, they’ll have more options to choose from, more time to decide, and more bargaining power. They might even get a discount off the list price.

Which brings us back to the wait. Given these conditions, why not sit back and see if prices fall further or if mortgage rates drop significantly?

Let’s start with the prices. Home value growth is slowing everywhere, and prices are even falling in some places. But that’s because houses have become so expensive to buy, not because people don’t want to buy. Inventory is increasing, yes, but perhaps more importantly, new listings have been pulled. Recent inventory growth can be explained by the same homes staying on the market longer. Houses that are sold go pending in about 16 days, which is slower than last year but much faster than before the pandemic.

That tells us that while the market is moving more slowly, we are nowhere near having an oversupply of homes on the market, which would be necessary for a significant price decline. We are severely underbuilt as a country, and there are millions of millennials and zoomers who have entered or are about to enter their prime home buying years. They will resume their efforts to buy as prices decline, and in the process they will ensure that any corrections are minor. In a recent Zillow survey, a panel of economists and housing experts projected annual home value growth of 2.6% in 2023, 2.7% in 2024, 3.7% in 2025 and 4% in 2026 That’s back to normal historical growth; it’s nowhere near a significant price drop.

So now a potential buyer might be thinking: Even if prices don’t drop significantly, the skyrocketing is over. Maybe you should wait and see if mortgage rates go down again. After all, rates have been incredibly volatile in recent months.

The rates below 3% that we saw during the pandemic were abnormal. They won’t be back anytime soon, especially with the US. Federal Reserve still outlining much remaining inflation control work. The Fed owns a mountain of mortgage-backed securities and, for now, has chosen to let them mature in their own time rather than trying to sell them quickly. But if and when the Fed decides to unwind its balance sheet, that’s likely to send rates higher still. There were certainly plenty of people who thought they’d wait for rates to go up to 4% and then 5% earlier this year, and they’ve only gone up ever since.

Perhaps more importantly, remember that these higher rates are what keep a large portion of current homeowners from becoming buyers. So if a first-time buyer tries to wait for the rates to run out and is right that they drop back down significantly, they are suddenly back in competition against all the homeowners who previously had rates locked in and who have a capital in a bidding war. . And they’re also bidding against a large chunk of other would-be first-time buyers who have been forced to sit on the sidelines for affordability as rates have risen. In a new Zillow survey of prospective buyers, conducted by The Harris Poll, 78% said they would speed up their home search if rates fell to 4.5% or less.

In that accelerating demand scenario, prices are likely to skyrocket again, competition is frenetic, and the right home becomes hard to find and even harder to win.

Do not forget a third consideration: Waiting is not free. Rents have been growing almost as fast as home prices during the pandemic. That makes it harder to save for a larger down payment and also provides an added incentive to secure a monthly mortgage payment that you know won’t grow 5% or more each year like a new lease will.

It is true that there are millions of people who simply cannot afford to buy right now. But those who can and want to buy their first home should not feel paralyzed by the changing market. This little bit of extra breathing room is an opportunity to slow down a bit and find a home they love. If mortgage rates eventually drop, a lower payment is one refinance away.

Guest comments like this one are written by authors outside of the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit comment proposals and other comments to [email protected].

You may also like

Leave a Comment