Is Now a Good Time to Buy a House? Yes, If You Can Find One

Now is a good time to buy a house, or at least start looking.

THE CRYSTAL BALL SAYS…

Many people vacillate for a long time before working up the courage to enter the housing market. They get stuck on the big question: “Is now a good time to buy a house?”

It’s hard to “time the market” in real estate. Often, by the time you get in and actually find a house, the market has already changed. So, in general, it behooves you to get out of the gate early, rather than wait for everyone else to start. So, if you are trying to “buy the dip” now is that time.

WHEN IS IT A “GOOD TIME TO BUY?”

When I say it’s a good time to buy, what I mean is (1) home prices are relatively low compared to where they will be in the near future, and/or (2) there is a large inventory of suitable homes to choose between.

Right now, home prices are lower than they will be come Spring & Summer 2024. Also, the inventory, while very, very low, is as good as we expect it to get for the next 12 to 18 months, at least relative to the buyer pool. Thus, by Seattle standards, now is as good a time to buy as we’re going to get for the foreseeable future.

Read on for the gritty details.

THE $5000 FLOODGATE

Not many people are buying houses right now. We’re in “the dip.”

In our experience, homebuyers tend to jump into the market—or get out of it—when the monthly mortgage on the median Seattle house is at $5000. Right now the median home price is $882,500 and interest rates are between 6.9 and 7.2%. Once we account for property tax, this brings us to a monthly mortgage of ~$5300, aka, more than $5000. This helps explain why we aren’t seeing a huge influx of buyers right now—we haven’t crossed the $5000 threshold.

By the time rates drop to 6%, the median mortgage will have dipped under the $5000 per month threshold and the buyer floodgates are likely to loosen (if not break open completely). This means more buyers entering the market. According to the law of supply and demand, more buyers => more demand => higher prices and more competition.

But what about the supply of houses? Will it increase to mitigate these demand-side pressures?

Nope. Not yet.

WHERE DID ALL THE HOUSES GO?

Many or even most Seattle area homeowners are sitting on rates in the 3.0-4.0% range. Some are even lower. Some have no mortgage at all–nationwide, 42% of homeowners have no mortgage whatsoever!

As a general rule, people don’t like selling if it means taking on a much higher mortgage payment then they’re currently paying. With rates near or above 7.0%, sellers who want to move from their old house to a comparable one would end up paying WAY MORE per month (and thus more overall) on the new house. It just isn’t worth it.

Let’s see an example.

Say a homeowner has a monthly mortgage of $3130 after buying or refinancing in 2020/2021/2022. If they wanted to move to a similar house, their new mortgage would be ~$5000. That’s a big difference! If they wanted a *slightly* better house, their mortgage would probably be in the $6000 range. Of course these numbers increase for higher price point homes, but you get the idea. Do we really expect people to double their mortgage willingly for only a modest upgrade, if any? Clearly not.

This begs the question, how much would rates have to go down for sellers to want to list their homes? Our answer: rates will need to go down to 5.0% or possible even 4.5% before sellers will feel good about listing. Here’s why.

HOUSE INVENTORY: THE TURNING POINT

Let’s go back to our example. Is it a good time to list if it means you end up paying ~80% more (per month) for a (maybe) 30% better house? No, probably not. What if rates go down to 6.0%? Then we’re looking at a new mortgage of $4550-5600, as compared to that $3130 we already have. Still pretty bad. How about 5.0%? Ok, now we’re talking $4200-5100, which is much better.

Remember what we said earlier about buyers wanting to enter the market around $5000. If we keep in mind that most sellers are also buyers in the same market, then we have to assume the same rule applies. At 4.5% rates, the seller’s new mortgage would be between $4000-4800, depending how much of an upgrade they want to make. Even if prices go up a bit, which is likely, they’re still in that $5000 a month range.

So, by this math, inventory will increase in earnest only when interest rates hit the 5.0-4.5% range.

WHEN WILL MORTGAGE INTEREST RATES GO DOWN?

Many of the major industry players have been saying that mortgage rates may start to creep down in Q4 2023, and will begin a steady, if slow, decline in 2024. Here’s what the experts say about our immediate future.

The companies that get paid the big bucks to know these things estimate that Q3 2024 (from now until the end of September) will be the peak of the mortgage market. Rates should crest and begin a gradual decline in the last quarter of the year, and may fall as low as 6.3-6.0% This is where things will start in 2024.

We think the industry “expert” timelines are overly-optimistic.

Or at least that’s what they’re saying. We’re not so sure. We’re of the opinion that rates won’t start to come down in any meaningful way until Q2 2024. Not so far off the expert predictions, but certainly different. Call us pessimistic, but we think this is a more realistic market prediction.

Regardless of when rates start to go down, we can expect the decline to be slow and steady, rather than precipitous. If all goes well, they could go to 6.0-6.5% by Q2. And they could go all the way to the low mid 5% range by the end of the year. However, it’s totally possible these benchmarks may be pushed back another quarter, even two, if the economy remains strong. In any event, since home sellers list mostly in spring and early summer, that low end of the range is unlikely to hit in time to significantly impact inventory during peak housing season.

PREDICTIONS FOR BUYERS

What does all this mean? In sum, we can expect rates to crest and (hopefully, maybe) start creeping down at the end of 2023. Sometime in March or April, buyers will see rates going down to around 6.0-6.5% and think it’s a good time to hop back into the market. However, sellers will not be motivated to list their homes because the rates have not yet gone down enough to justify their new mortgage. Thus, buyers will experience a highly competitive spring and summer 2024, with prices increasing slightly faster than normal (but hopefully not so fast that they outpace the monthly payment reductions caused by lowering of interest rates).

WHY IS NOW A GOOD TIME TO BUY A HOUSE?

*Because it’s not going to get better than this for the foreseeable future.* If you wait until Spring or Summer 2024 to buy, seasonal and macro-economic factors are going to make things decidedly tougher, and likely more expensive.

If you have the desire and financial ability to buy (I always include this caveat!), then now is about as good as things are going to get both in terms of prices and competition from other buyers. Yes, inventory is historically low; however, this doesn’t mean you should give up or not bother searching. Instead, it means you should be patient and wait for the right house to come online. It might; it might not. But you miss 100% of the shots you don’t take. So, get out there and have a look!

Extra Credit: The Refinance Trick

Don’t forget, if you buy a house now (at the lowest prices you’re likely to see for the foreseeable future), you can always refinance into that lower rate when it comes around in the next year or two. This means you’ll end up getting a house for cheaper AND pay less monthly than your friends who wait until everyone else decides it’s time to start looking again!

P.s., What about sellers?

Now isn’t the worst time to sell, if it makes sense for you. But, if you can wait until next year, it could be well worth it! Feel free to reach out to us for more details. Maybe we’ll post about it!