Here’s what you need to know to make a decision in today’s market.
Interest rates have risen dramatically in just a few short months, and in an effort to tamp down inflation, the Federal Reserve has raised interest rates from near zero in March 2022 to about 4% this past November. As anybody considering buying or refinancing a house knows, these interest rate hikes make the cost of taking out a mortgage much higher.
When Karley Bond meets with prospective homebuyers these days, she often encounters confusion and anxiety. Bond, who is a Regions Bank Area Manager and mortgage lender in Jackson, Tennessee, understands why people are so perplexed about whether it’s a good time to buy a house.
“Many people, especially in the millennial generation, have never experienced rates in the range where we are today,” she says. “We have had a long run of rates being below historical averages, so people are used to low rates. Also, we’ve not seen rates rise this quickly.”
Remember that you don’t need to establish your homebuying budget all by yourself. Reach out to a mortgage expert like Bond early in the process. They can help you determine exactly what you can afford and potentially preapprove you for a certain amount—which can help you refine your search.
If you are thinking of buying a house, here’s what else you should know.
Rising Rates and Falling Prices
While the rapid increase in interest rates is jarring to many potential homebuyers, it’s not the only factor people should consider. As a start, it’s helpful to look at history. In the early 1980s, another period of high inflation, the Federal Reserve hiked interest rates from 14% in January 1980 to a historically high range of 19% to 20% at the end of the year.
So even though rates seem painfully high now, they are not anywhere near historic peaks. What’s also important to remember is if you opt to buy a house and rates go down, you can later refinance to take advantage of the decrease.
Interest rates alone should not be the only factor you weigh. Over the past few years, home prices have skyrocketed, especially in certain geographic locations. In fact, the median sales price for an existing home in 2021 was $346,900, an increase of almost 17% from 2020.
The long upward trajectory of home prices, however, has reversed, and the plunge may soon accelerate. A recent study from the Federal Reserve Bank of Dallas—which found that U.S. house prices increased nearly 95% between 2013 and early 2022—forecasts that prices could fall up to 20% in the near future. In certain markets around the country, prices didn’t rise as dramatically as the national median price. Those areas could get even more affordable soon.
“It has turned more into a buyer’s market,” Bond says. “We are seeing sellers willing to buy down the interest rate, pay closing costs, come off their prices and pay for repairs. People were paying over list price, but today, buyers can offset a higher interest rate with better prices and seller concessions.”
The Evergreen Benefits of Homeownership
The purchase of a home inevitably involves weighing obvious pluses and minuses, like interest rates and home prices. But it’s also important to keep in mind that homeownership can be a powerful vehicle for wealth creation.
When Bond meets with potential homebuyers, she often finds herself educating them about what they can realistically afford—always taking into consideration maintenance and unexpected costs, like replacing an air conditioning unit. But the conversation also typically involves reinforcing what a good long-term investment a home is.
“When you add up the rent you are paying and compare it to the equity you may build from day one, that number speaks volumes,” Bond says. “There’s still a big gap to educate the younger generation about building wealth and how a home can be a generational wealth investment.”
Three Things to Do
- Review your monthly budget and calculate how much you could afford to pay for a home.
- Read about refinancing your mortgage, so you’ll know the basics if rates start to drop.
- Find a mortgage lender in your area using our easy tool.
