“Interest rates are just too high. I think it's smart to wait till they improve, then I think I'll buy…”
This has been the topic of many conversations I have been having lately, and I wanted to put a little pen to paper to explain the big picture adequately.
First, let's be honest, we're all slightly tempted by that thinking. After all, mortgage rates have been climbing, and it would be nice to lock in a lower rate whenever they eventually come back down. It makes sense on the surface.
But when you examine the numbers and consider the bigger picture, does waiting for rates to improve before purchasing a home make practical economic sense? I'm still determining if it does. Let me break it down for you.
Let's say rates drop to 5.5% in 18 months (a reasonable speculation based on historical averages, but still on the lower end). For a $600,000 home purchase with 10% down, sure, you'd save about $9,000 in annual interest for the first few years compared to buying now at 7%. These are not insignificant savings.
However, during that same 18-month period, respected data analytics firms like Black Knight, CoreLogic, FHFA, Case-Shiller, and Zillow all project average home appreciation of 6-7% annually. Their projections for Texas are even higher due to our state's booming housing market. I personally project 7-11%.
So by waiting 18 months, that $600,000 home is likely to appreciate to around $660,000. Yeah, the mortgage payment would be about $155 lower per month at 5.5% compared to 7%. But is saving $2,800 over 18 months worth passing up $60,000 in home equity appreciation? I don't think so.
And that $60,000 missed appreciation doesn't even account for the $8,000 or so in principal reduction you'd achieve by buying now and starting to pay down the mortgage. Or the tax benefits you could capitalize on as a homeowner.
The hard numbers don't seem to support the idea of waiting for rates to come down before buying a home, at least not from a purely financial perspective.
Some might argue, “Well, Jo, surely that appreciation rate can't continue forever. There's bound to be a housing market decline at some point.” Is there really, though?
Think about this for a minute: From 1950 to 2010, we built an average of 22 million new housing units per decade to keep up with demand. But from 2011 to 2020, only 6 million units were constructed—a staggering 72% dropoff from previous decades.
Did 16 million fewer families suddenly stop needing homes over the last decade? Of course not. Those people are still out there and need housing just like the rest of us. We have a massive pent-up demand that the housing supply can't keep up with.
That lack of supply, coupled with inflation driving up construction costs, is fueling this sustained home price appreciation. I haven't seen any credible data suggesting construction and land costs will drop enough to resolve the inventory shortages anytime soon. We're simply not building enough affordable housing to meet demand.
Some will point to the uptick in apartment construction as a solution. But most Americans still want to own their own homes instead of renting indefinitely, so apartment living isn't a viable long-term alternative for the majority.
Are you still trying to convince me that home prices are unlikely to decline substantially? Out of the last 80 years, do you know how many years saw a drop in real estate values nationally? I was shocked to learn the answer is only six years! Just take a look at this chart.
The data is clear: real estate values have an incredibly consistent upward trajectory, even when accounting for the occasional dip.
So, if you need to buy a home for your family instead of continuing to rent, don't wait for mortgage rates to improve. You'll likely leave much more money on the table by missing out on appreciation than you'll save in interest over the short term.
Of course, personal financial situations vary, and there could be good reasons to wait for some buyers. But looking at the numbers objectively, it's hard to make a solid economic argument for holding off on purchasing a home just because interest rates are high. Get in the market now, start building equity, and take advantage of those long-term appreciation gains.
Just some food for thought! Feel free to let me know if you have any other questions. Here is the link to schedule a call with me, http://byjoandco.com/call.
I hope you have found this blog post super helpful. If there is anything else we can do for you, including helping you sell (or buy) a home, I would be honored to assist. I hope you have a great day/evening. Cheers, E + J.
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