April 12, 2024

U.S. interest rates for 30-year fixed mortgages officially crested at 7% in early October, making it even more difficult for homebuyers to lock down a decent deal on a new home.
Some historical perspectives may point to a sense of normalcy right now, with mortgage rates averaging 7.76% between April 1971 and September 2022.
But that’s not going to make homebuyers feel any better.
“As interest rates go up, home values typically go down,” said Nationwide Mortgage Brokers president Jodi Hall. “For the average consumer, this means that for every 1% increase in interest rates, their buying power decreases by an average of 11%. In turn, prospective borrowers will qualify for less of a home because more money is needed to pay the principal loan difference.”
While some economists are predicting the U.S. real estate market may see 20% home price declines in a handful of very overvalued markets over the next year or so, home prices have yet to come down that dramatically.
A case in point.
Data from the American Enterprise Institute’s Housing Center shows that home prices fell by 1.6% from July to August. Meanwhile, the latest Freddie Mac figures from the last week in September peg the average 30-year, fixed mortgage rate at 6.7%, although that figure stands at 7% in the first week of October.
“It’s certainly possible that some borrowers are being offered rates closer to 7% or even 8%, though rates much above 7% are likely only going to be offered to those with poor credit or another aspect of their financial profile that makes them appear risky to lenders,” said Lending Tree senior economist Jacob Channel.
Given the rate risk in play, is it a good time, in general, to buy a home given that property prices are declining?
“Anytime can be a good time to buy a home, just so long as you’re financially and emotionally prepared for the responsibility of homeownership,” Channel told TheStreet. “Remember that predictions about the housing market are just that – predictions. Nobody knows for sure where prices will go, and even the most seasoned experts have trouble timing the market.”
Consequently, waiting six months could get you a slightly lower price, but even the experts don’t know for sure. Additionally, if rates continue to rise, then buyers could still end up paying more for a home.
“It’s very important to keep in mind that while some are saying that home prices will drop by 20% over the next year, the consensus from most economists is much less bleak,” Channel noted. “In fact, organizations like the National Association of Realtors, Freddie Mac, and Fannie Mae are all still predicting positive home price growth next year – though only very modest growth.”
Double-digit price drops in most of the country don’t appear all that likely at the moment.
“Even if prices do come down from 2022 levels, it’s entirely possible that they will only fall to their 2021 levels,” Channel added. “In other words, even if prices do come down, homes will still remain expensive. In other words, would-be buyers shouldn’t count on a housing crash to come along and suddenly make real estate dirt cheap.”
Aggressive buyers looking to land a new mortgage and a new home in this economic environment should feel free to wade into the market, but with both eyes wide open.
“The best time to buy a house is when life dictates that you need one,” said Paceline Wealth Management founder Jeremy Bohne. “It's a very challenging time to buy a home right now, so you need to update your financial plan to make sure that a purchase doesn't adversely affect your financial situation and lifestyle.”
Americans looking to buy a home will likely face lower prices but much higher mortgage interest costs than those that bought in the last two years.
“The upside of this is that they may actually be able to refinance into a lower rate in the future, whereas those that bought last year or so both paid a higher price AND are unable to refinance to a lower rate,” Bohne said.
If you can’t afford the house of your dreams today, then develop a disciplined plan to get it tomorrow.
“Renting, without adequate savings, sacrifices your chances of home ownership,” Hall said. “A better approach is to buy the home you can afford and patiently build equity. This move will strengthen your financial options to upsize later.”
It’s also a good idea to build a strong relationship with your financial adviser and local realtor.
“These specialists will be the glue that pulls the deal together,” Hall told TheStreet. “Be it, a first mover advantage based on local knowledge or locking in interest rates to preserve financing ahead of the deal closing, your advisers are incentivized to ensure your interests are both secured and satisfied.”
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