Should I Buy a House Now or Wait? Why High Mortgage Rates Shouldn’t Scare You

The combination of high home prices and high interest rates has made homeownership less affordable, preventing many prospective homebuyers from entering the market. And if you’re asking yourself, “Should I buy a house now or wait?”, you’re not alone.

While it may seem like a good idea to wait for mortgage rates to drop before buying a home, many experts advise against this, even in today’s mortgage rate environment.

If you’re thinking about delaying your purchase because of the current mortgage rate environment, it’s important to take into account all the potential factors that might also have an impact if you choose to wait.

Should I buy a house now or wait?

Homebuyers who have entered the market in the past couple of years understand just how tight the housing inventory has been. This low supply of available homes has created more competition. A seller’s market greatly reduces negotiating power for homebuyers.

Having few homes to choose from, many would-be homebuyers have opted to wait things out, optimistically hoping more homes will hit the market. After all, if more homes become available and mortgage rates fall, this would be an ideal time to re-enter the market.

Here’s the problem. If mortgage rates drop, more homebuyers will flood the market.

More buyers would create an increase in demand for homes. Higher demand would mean even less inventory in certain markets, particularly if new construction cannot keep pace with demand.

A decline in mortgage rates would not only result in a reduced supply of available homes, but also trigger another unwanted effect - higher home prices and multiple offer scenarios. This could mean we’d see even more of a seller’s market, giving home sellers, not buyers, greater negotiating power.

Begin building equity sooner than later

When most people think of homeownership, they often associate it with the feeling of security or stability it provides. However, what can sometimes be underestimated is one of the most significant financial perks of owning a home: the growth of home equity.

Understanding home equity is important because it is one of the few investments that has proven to build long-term wealth over time.

Calculating home equity is not hard. It’s the difference between how much your home is worth and how much you owe on your mortgage. If your house is worth $400,000 and you own it free and clear of any mortgage debt, you have $400,000 in equity.

Homeowners in the U.S. have enjoyed an impressive amount of home equity over recent years. This is thanks to home appreciation. Since the year 2012, the average rate of home price growth has been 7.7%. Recently, Americans experienced a slight decline in home equity for the first time in over a decade. On average, U.S. homeowners lost approximately $5,400 of equity in the first quarter of 2023.

This slight loss of 0.7%, however, pales in comparison to the average amount of home equity possessed by U.S. homeowners. According to the CoreLogic homeowner equity analysis through the first quarter of 2023, the average U.S. homeowner has more than $274,000 in equity.

Home prices may increase – even more

If you are asking yourself, “Should I buy a house now or wait?”, you’re not the only one. Many prospective homebuyers are pondering the same question. There are a few considerations to keep in mind as you weigh your decision.

When mortgage rates drop, homeownership becomes more affordable. This can stimulate greater demand for homes.

The increased demand for homes, driven by lower mortgage rates, can cause home prices to surge. As more prospective buyers enter the market to take advantage of reduced borrowing costs, competition will become fierce.

In areas already experiencing a limited supply of housing inventory, this effect can become even more evident, leading to faster appreciation of home values. For home sellers, this will be a good thing, as it means more wealth-building equity for them.

You may be able to refinance later

A saying that has grown increasingly popular, especially when rates rise at the levels we’ve seen over the past 12 months, is “Marry the house, date the rate”.

The concept is that if you find a home that you fall in love with but don’t love the rate, that’s okay. The rate is temporary, similar to someone you’d date but never really commit to.

You may be able to refinance to a lower rate if mortgage rates come down. So, instead of focusing on current mortgage rates, focus on finding a home you love and want to tie yourself to.

Waiting for a recession may work against you

It’s true. Recessions can sometimes create opportunities to buy homes at potentially lower prices. It’s also true that there’s no guarantee to this logic.

Recessions are volatile periods of time. Home prices can rise or fall depending on various factors, including the labor market outlook, the rate of unemployment and the impact on household incomes.

Not only are many experts predicting there won’t be a recession, but home prices could also remain high regardless of a recession. Remember, if mortgage rates fall, home prices are likely to boom.

Holding out for that 6% rate could backfire

Despite forecasts of lower mortgage rates in 2024, you shouldn’t expect them to bottom out to the record lows of the past decade, either, says Lawrence Yun, chief economist at the National Association of Realtors. “The low rates of 2020 and 2021 were unique and those that got them were lucky,” he says.

There’s also the possibility that today’s mortgage rates represent a new normal rather than just a short-term bump. ”If you look at the mortgage rate data going back to 1971, the average rate on a 30 year fixed rate mortgage is about 7.75%, which is roughly where we are today,” says Bill Nelson, CFP, founder of Pacesetter Planning.

“Borrowers are looking at current rates and viewing them as abnormally high and thus, expecting that they’re likely to fall in the next 5-10 years,” he says. “But the reality is that current rates are average and the rates over the past decade or so have been abnormally low.”

Remember, even if rates were to come down to 6% or better, more buyers will likely storm the market. This will stimulate more demand for homes, potentially costing you more due to increased home prices.

Buying now vs waiting for the unknown

Trying to time the housing market is a risky venture. And if you’re still deliberating, “Should I buy a house now or wait?”, we hope you now have a little more clarity on your decision.

The direction home prices and mortgage rates are headed in the upcoming months is yet to be determined. What is known is that there are fewer individual homebuyers and investors in today’s purchase market. This has resulted in less competition for homes now than in recent years.

There are also fewer bidding wars than we’ve seen over the past couple of years. All of these factors allow for more negotiating power.

If you are trying to decide whether to buy now or wait, one thing is certain. You shouldn’t wait to speak with a lender. By getting your ducks in a row with a full pre-approval, regardless of when you decide to buy, you’ll be ready and ahead of the game when the time comes.