Should I Wait for Interest Rates to Come Down Before I Buy a Home?
March 22, 2023
Should I Wait for Rates to Come Down?
Who is this Jerome Powell fellow, and why is he making it impossible for me to buy a house?!
Mortgage interest rates: it seems like all anyone can talk about these days in the Seattle real estate market. And with good reason. The basic equation of housing affordability boils down to just two main factors: home price and interest rate. Multiply one by the other, do a few other nerdy math things, and you get that seemingly overwhelming number that is your monthly mortgage payment.
All other things being equal, when interest rates go up, so does your monthly mortgage payment.
(Of course, this is only true for current buyers. Homeowners with existing mortgages are, by and large, not impacted by changing rates. The exception would be for ARMs, but that’s a conversation for another time.)
What is the Interest Rate Right Now?
As I’m writing this blog, the median interest rate in the United States sits somewhere between 6.5% and 7%. That feels high, right? Remember this time last year, when the median rate was around 4%? Or how about all of your friends who bought between early 2020 and late 2021. They received sub-3% rates and are now sitting on their mountains of cash, laughing down at the rest of us unfortunate plebeians who missed out? In this context, a 6.5% rate sounds astronomical. And thus, the question arises: should I wait until interest rates go down before I buy a house?
Good question; let’s look at the facts.
The next piece of this blog is going to be a bit in-the-weeds on interest rates, including how interest rates work and what causes them to change. If you want to jump ahead to our concise analysis of whether you should wait for rates to go down before buying, CLICK HERE to be spared.
First and foremost, it’s important to recognize that today’s rates are not historically high. Far from it.
In fact, anyone who bought a house during or prior-to the early-2000s would have been ABSOLUTELY THRILLED to get a 6.5% interest rate. Don’t take my word for it; check out the chart:
Despite the recent jump in rates, we’re still on the right side (down slope) of the interest rate mountain.
Ok, so rates right now aren’t quite what we’d like them to be, but they’re also not historically horrible. So, if you want to buy a house, should you just wait until the rates go down? That means the house will be cheaper… right?
Maybe, but maybe not. Again, the monthly cost of the house you buy is determined not only by your mortgage rate, but also your home’s sale price (which correlates to the size of your loan, in the equation above).
(The astute will also note that property taxes, HOA costs, downpayment assistance loans, etc. are additional factors impacting the monthly cost of home ownership. This is true, but they are smaller factors and operate somewhat independently of price and interest rate. So, for the sake of argument and simplicity, we’re leaving those out of this particular conversation.)
How Much Does it Cost to Buy a Home in Seattle?
Year over-year data for this time of year, from 2021-2023.
As of today, the median home price in Seattle is $835,000. Let’s say you buy a house today for $835,000 and your rate—yay for good credit!—is something like 6.6%. (BTW—if you were getting what’s called a “jumbo loan” (aka, a single family home loan over $977,500) that rate would be significantly lower).
Your monthly payment on a 30-year fixed mortgage would be approximately $4,910, or just a hair under $5,000. (Note that this number includes expected property taxes and home insurance costs, all of which are typically paid lump sum alongside your mortgage.) In our recent blog, we noted that based on our observations, most first-time Seattle home buyers are comfortable paying a mortgage up to around $5,000 a month. (Apologies in advance to those of you who think I’m insane for saying $5,000 a month is affordable; this is just what we’ve observed people are willing to pay!)
Hitting the Tipping Point.
In other words, we’re sitting right around the tipping point where we would expect buyers to start hitting the brakes. Conversely, we’re right around the tipping point where we’d expect buyers to start entering the market. We know that, historically, prices rise through the first and second quarters of the year (January to June). We also know that sales sharply increase during this time period. Long story short, it’s likely that the buyer pool is going to stay competitive over the next several months. AKA, homes are not going to get cheaper.
Note the jump in price from the start of the year until mid-year. Side note: the second bump near the end of 2020 was an anomaly brought on by the COVID Pandemic. That’s the scale of event it takes to break these seasonal patterns!
You might find a couple of our blog posts useful in thinking about this topic:
But what about that Jerome Powell fella, who we name-dropped at the top of the post? Well, he’s the head of the Federal Reserve (“Fed”), a government entity which, among other things, sets the eponymous “federal funds rate.” For our purposes, think of the federal funds rate (“Fed rate”) as the cost the banks/lenders have to pay to lend you money for your mortgages.
Loosely stated, the Fed rate impacts the lender’s cost of doing business, which passes on to you, their customer. The Fed rate is the number we hear about most often in the media when news anchors, etc. are talking about inflation and rising interest rates. To once again make a long story short, the Fed rate has a strong, if indirect, impact on the mortgage rates available to home buyers. As the Fed rate goes up, generally, so does your mortgage rate. But, it’s a bit more complicated than that, and the distinction is important.
Rate changes are not coequal with mortgage changes
The Fed rate changes do not always correlate 1:1 with mortgage rate changes. The mortgage lending market is responsive to multiple changing factors, including the Fed rate. However, they are also savvy, and attempt to preempt those changes. This means that, to some extent, Fed rate increases are already “baked in” to lender’s calculations for mortgage interest rates. However, when the Fed changes course, aka, when it changes its policy regarding its rates in unexpected ways, lenders need to be reactive.
Now, inflation: what’s the deal with that? Well, first, it’s how we measure the value of a dollar. As inflation goes up, the value of the dollar goes down. This is bad, of course. We love our dollars, we want them to feel special and valuable. We don’t like when they lose value. The Fed feels the same way, and they use the Fed rate (and a few other rates that don’t matter to us here) to keep inflation down. Basically, they raise the Fed rate as a way of making the dollar more valuable to stymie inflation. (There’s really a lot more to be said here about inflation, rates, and the Fed, especially in light of recent developments around regional bank failures, such as Silicon Valley Bank. Feel free to reach out to discuss with us privately!)
Due to world events and the overall state of the domestic economy, we can expect inflation to continue to increase for the time being.
As it slows down, so will the changes to the Fed rate, which should, hopefully, have a positive (lowering) effect on mortgage interest rates. That said, mortgage insiders tell me that the relationship between the Fed rates and mortgage rates is not as strong as it used to be. Namely, because the economy and job market are looking quite good on the whole, despite inflation rising and recent struggles of regional banks (which, somewhat ironically, is likely to lead to lower mortgage rates). Therefore, changes—particularly inconsistent changes to the Fed rate—are likely to result primarily in mortgage interest rate volatility (aka big day-to-day changes) rather than have a steady, predictable impact.
It’s also important to note that inflation and the Fed reserve rate are not the only factors that affect general mortgage rates. Other factors such as the overall state of the economy, the price of 10-year treasury bonds, etc. impact mortgage rates as well. Some would even argue these factors matter even more than the Fed rate.
Taking all of these various factors into account—and summing things up, to avoid making this blog into a full-on treatise—we can say that rates are likely to hover around where they are now until late 2023 and then start to go down slowly after that. They may well remain volatile in the interim. The big players in real estate financing tend to agree.
Should I Wait for Rates to Come Down Before Buying a House?
In many situations, the answer is going to be a resounding NO!
First of all, other people are buying. As we stated above, this means more competition, which means home prices aren’t going down. Further, rates are unlikely to dip significantly until the end of this year or early 2024. Even then, we can expect more of a slow and steady decrease than a precipitous drop, at which point buyers (like you!) will start to read the signals and get back into the market, driving prices up. This means that homes are not likely to get cheaper while you wait for rates to go down. They’re more likely to stay flat or even increase in cost.
You know what they say about the stock market: The right time to start investing is always now. This is because your investment accrues value over time, and despite your best intentions, you are unlikely to be able to “time the market” without significant risk. The same is true of real estate. We at Get Happy at Home have literally never had a client tell us they wished they had waited to buy. Conversely, we hear all the time that people wish they had bought sooner! With only narrow exceptions, the right time to buy is when you feel ready and can afford to do so; no sooner, no later. The home you buy will start gaining value from day one.
Rates Today Are Different than Rates Tomorrow
Furthermore, the rate you get today isn’t necessarily the rate you pay tomorrow. As we saw over the last few years, when rates go down, refinancing booms. Plenty of individuals with 7%+ rates from the 2000s and 2010s refinanced into much lower rates recently and saw their payments decrease. Thus, they weren’t stuck with the “high” rate forever. Similarly, many individuals never really feel the cost of the high rate because they sell their home quickly; the average length of new home ownership in Seattle seems to be 5-7 years. So, you don’t actually end up paying all that interest you thought you were on the hook for.
You can also get deals in some situations to mitigate the cost of interest even further. You might use a 5- or 7-year adjustable rate mortgage, which means you’d be paying an artificially low rate in the first several years of ownership. Refinancing your ARM into a fixed rate mortgage once rates go down, as they inevitably will. You could also negotiate with a seller for a 2-1 rate buydown, which means you would be paying thousands of dollars less in interest in the first two years, making those initial payments significantly less painful. And, just to be clear, with good lenders, you can often lock in your rate today and then, if the rates go down before you close on a house (there’s that volatility thing again), you can renegotiate to that lower rate!
Should I Wait for Rates to Come Down: CAVEAT 1
The big caveat here is that you must be able to pay your monthly mortgage bill in order to buy a house now. The good news is that lenders are not going to approve you for a loan they don’t think you can afford. The bad news is that they likely think you can afford more than you would like to pay. So, if you see that ~$5,000 a month mortgage payment on the $835,000 house, and you think, “sure, I can do that, but I’ll be eating frozen dinner and drinking instant coffee for the next 5 years, oh and I have to sell my car,” maybe look for something a bit cheaper or hold off until you have the finances to make that payment look less scary.
Should I Wait for Rates to Come Down: CAVEAT 2
The smaller caveat is also more personal than macroeconomic. Perhaps you expect a change in income over the next several months or years. Are you going to take a big pay raise on an upcoming promotion? Well, that could affect the rate you get, as well as your ability to afford a monthly mortgage, and you may want to wait until you get that raise to purchase a home (though you can always start looking now so you’re ready to pounce when the right home hits the market!).
Do you expect a windfall of cash coming soon, either from family members, vesting stock, or a big pirate treasure hunt vacation you’re planning for this summer? Well, maybe wait until you have access to those funds. You can use them for a larger down-payment and reduce your monthly mortgage. Are you planning to get married soon? Or are you considering living with friends? Maybe you should wait until you have those decisions under wraps, because having more people on the mortgage means a smaller payment for everyone (usually)!.
So, unless you fall into one of the exceptions noted above, our advice to you is to buy now. Or whenever you feel ready. Because waiting for rates to drop is a surefire way to miss out on equity and possibly end up paying more than you might otherwise, rather than a savvy way to save some money.
. . .
As you can probably tell, I totally nerd out on this stuff. It’s fascinating to me, and knowing this information helps me to better advise my clients. Know that it’s never too early to reach out to a real estate agent. Even if you’re still a few years out from buying a home, it’s never too early. We can help you strategize, set you up with lenders, and guide you every step of the way.