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Home-buying conditions aren’t nearly as good as they were a year or two ago, but that doesn’t necessarily mean you should stay away. Here’s why.
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Many people who would love to become homeowners are staying on the sidelines, and to be fair, it’s easy to see why. According to Mortgage News Daily, the average 30-year fixed mortgage rate is now 7.72%, the highest level since 2000, and home values in the U.S. have risen by 34% in the past three years alone. The average mortgage payment when buying a home has more than doubled since mid-2020.
Having said all that, it isn’t necessarily as bad of a time to buy a home as you might think. Here are three things to keep in mind when considering whether to stay out of the market or take the plunge into homeownership.
Your mortgage rate isn’t necessarily forever
Legendary investor Warren Buffett generally cautions against using any type of consumer debt to buy things, with one big exception — 30-year fixed-rate mortgages.
His primary reason is that mortgage rates can be adjusted downward if rates fall but will never increase no matter what average interest rates do. If you get a mortgage with a 7.5% APR in 2023, that’s the highest borrowing cost you’ll have to pay in the next 30 years. Even if rates continue to rise and hit 10% or more, your payment won’t rise.
On the other hand, while 3% mortgage rates are unlikely to return anytime soon, many experts believe mortgage rates will settle back into the 5% ballpark within the next couple of years once the Federal Reserve has brought inflation under control. And if this happens, you can simply contact a refinancing lender and you can end up with a lower rate and monthly payment.
In short, it’s a mistake to think of today’s higher mortgage rates as permanent. While nobody can predict the future, and it could certainly take years for rates to really cool off, there’s a strong probability that rates will be significantly lower than they are today sometime in the next 30 years and you’ll be able to refinance.
Prices could rise even further if rates drop
Many people are convinced that with higher mortgage rates, home prices are set to drop. But don’t be so sure this will happen.
The inventory of existing homes for sale is at a historic low, and a big reason is that millions of homeowners have mortgage rates of 4%, 3%, or even less, and are reluctant to lose those rates by selling. But if rates start to fall — even by one or two percentage points — prospective home buyers could come rushing back into the market, even though rates wouldn’t be low enough to encourage more people to sell.
In fact, real estate expert and Shark Tank star Barbara Corcoran recently predicted that home prices could rise by as much as 15% from the current levels as mortgage rates fall. For context, a 15% increase would mean that a home that costs $500,000 today could be worth as much as $575,000 if rates start to cool off.
Build wealth for you, not a landlord
According to the most recent Federal Reserve Survey of Consumer Finances, the average renter in the United States has a net worth of about $96,000. Meanwhile, the average homeowner has a net worth of nearly $1.1 million.
There’s a reason for this. Homeowners build equity in their homes over time by paying down their mortgage, while renters don’t get any ownership interest in exchange for their monthly payments.
Of course, homeownership isn’t right for everyone. But if you’re planning to stay in one place for the next several years at a minimum and you can comfortably afford the mortgage payments, owning a home can be a great way to grow your wealth over time.
It could still be a good time to buy
Although mortgage rates are high and home prices are far greater than they were just a few years ago, there’s still a solid argument to be made in favor of homeownership. Not only has the cost of rent increased significantly along with home prices, but pent-up demand could cause prices to soar even higher if rates take a dive. With the ability to refinance a mortgage loan if the interest rate environment cools off and much less competition in the housing market than there was a year or two ago, it could be a smart time to take the plunge into homeownership.
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