Higher than normal interest rates over the past year and a half have kept many potential homebuyers on hold, waiting for either long-awaited Federal Reserve rate cuts or a halt in housing price increases.
Since neither of these appears to be happening, the dilemma continues: Should you keep renting or finally move forward with a home purchase?
In today’s complex real estate market, knowing when to take the plunge isn’t always easy—but that doesn’t mean you shouldn’t. If you’re beginning to feel like you might be ready to make your homeownership dreams a reality, here’s what to know to help you make that first step.
How did we get here?
Before you dive into the market, it’s important to understand what factors shaped its current conditions—namely, interest rates and inventory—so you can ensure that you make informed decisions.
At the beginning of the COVID-19 pandemic, one of the primary concerns for many households and government entities was the impact of a prolonged shutdown—both on individuals and on the broader economy. Among the solutions rolled out to support consumers was a Federal Reserve funds rate cut, which resulted in unprecedented low interest rates that lasted for much of the pandemic. Homeowners and homebuyers alike took advantage of these better rates, with the former refinancing their existing mortgages and the latter applying for loans now that they were suddenly more able to afford the homes of their choice.
Postpandemic, the landscape shifted again, with rising levels of inflation in response to a white-hot economy featuring low unemployment and higher wages. To counter this inflation, the Fed stepped in once more with a series of interest rate hikes designed to slow the economy. The problem? It also slowed the housing market.
Homeowners who may normally have been looking to sell instead resisted giving up their favorable pandemic-era loans for ones with a much a higher interest rate. At the same time, rising health-care costs meant that more older homeowners began choosing to age in place, adapting their current homes for accessibility rather than moving to coastal condos or assisted living facilities. And on top of that, the market is still feeling the negative impact of both the 2008 housing bust and the material and labor shortages of the pandemic, limiting how many new builds have been added to inventory in recent years.
All of the above has led to housing shortages in most of the country’s major real estate markets, driving up demand and, subsequently, home prices. Couple that with high interest rates, and it’s no surprise that so many potential homeowners have been left feeling uncertain about what they should do next.
The answer isn’t to wait
If the last few years have taught us anything, it’s that the housing market hasn’t gotten any easier or cheaper. Many buyers who have put off their purchases to wait for more favorable market conditions are still waiting.
The reality is that it’s impossible to predict interest rates—you’re never guaranteed a better one if you hold off on buying. In fact, today’s interest rates are actually quite a bit lower on average than those we’ve seen over the past fifty-plus years. Sure, they may be higher than they’ve been for the past decade and a half, but that’s because of two unprecedented economic disasters. Thus, it’s really more like comparing apples and oranges: they’re two totally different entities.
Meanwhile, home prices are highly unlikely to fall in the foreseeable future without a major push for home construction. Even then, continuing growth in the population of younger generations looking to buy will generally prevent supply and demand from shifting in favor of lower home prices.
So if you want to buy a home, just go for it! Don’t miss out on years without your dream home or a chance to build equity out of fear or hesitation. As long as you act decisively and get your ducks in a row, such as with a preapproval and a solid purchase offer, you can put yourself in a strong position to strike now and turn your homeownership dreams into reality.
Consider all strategies and options
Though there may be little you can control when it comes to interest rates and home prices, there is still plenty you can do to help safeguard your finances. For one, take any and all steps to improve your credit score, debt-to-income ratio, and even potentially your income. The better they are, the less of a risk you will seem to lenders and the more favorable rate you may receive.
Further, save up more for your down payment, if possible. By reducing the amount you finance up front, you also reduce the amount of interest you’ll have to pay over the life of your loan, regardless of your rate. In addition, you can look at alternative financing options from a conventional loan, such as an adjustable-rate mortgage (ARM) or an assumable mortgage, which allows you to finance some of your purchase at the homeowner’s existing rate.
Let’s say you move forward with your home purchase and then interest rates do fall. Don’t worry—you aren’t without options. Primarily, you may be able to refinance, depending on factors such as how long you’ve had your mortgage. This will give you a new home loan with an interest rate that reflects improved market conditions. Just keep in mind that it’s likely you’ll have to pay more fees and closing costs on your new loan and may extend your repayment timeline. Work with your lender or financial advisor to crunch the numbers and verify that a refinance process would make sense for your specific situation.
Whatever strategy you choose, stay informed about market trends and periodically review your mortgage terms. By keeping an eye on new changes in the prevailing interest rates, you can better identify opportunities to optimize your financial situation.
In today’s fast-moving housing market, putting off buying a house can leave you open to higher costs and more frustrations later. Consider your financial readiness, then reach out to a real estate agent, who can help you make the most informed decision possible—one that’s in your best interest now and in the future.
