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Interest Rates Rising & Home Buying

What You'll Learn: How Rising Interest Rates Impact Home Shopping

EXPECTED READ TIME: 8 MINUTES

Interest Rates Are About to Rise, What Does That Mean for Buying a Home This Year?

If you are considering a home purchase this year, you have probably been watching the housing market and interest rates closely. Interest rates reached historic lows but have slowly begun to rise. Add to this; home prices climbed at a record pace in the past year. Does this mean it’s the wrong time for you to buy a new home? Certainly not, but you may want to accelerate your search to get the best rates. While it is always nice to get the best possible rate and have a smaller total monthly payment if you can afford the home, buying is never a wrong choice. That said, if you are looking for that dream house and a change in rates can put you out of the market, you may want to hurry up.

Why is now an excellent time to buy a home?

Whenever we buy a home, the right time to buy is always subjective. The question relates more to your current personal finances than it does to the market as a whole. If you are renting and plan to stay in an area for more than two years, and you can afford to buy a home, then there is no question now is the right time to buy a home.

There are some current housing trends that should be kept in mind; these trends may help you make the decision to buy sooner rather than later.

In early 2022 we see a US housing market with the following characteristics:

  • Home prices in the US market are still on the rise. When this is the case, it normally makes sense to make that home purchase if you can afford it.
  • It is also predicted that the countrywide increases in prices will slow down through the rest of 2022. However, they are not likely to reverse any time soon, so waiting for lower home prices does not make sense.
  • Off their historic lows, mortgage rates are now climbing. What should be considered is that they still remain very low, and even if they were to reach the level of 4% this year, that is still just more than half of the historical mortgage rate average (for the years 1971-2021, the average is 7.86%).

Higher Mortgage Rates are Expected

Seeing mortgage rates fall so far in 2020 and 2021, we are tempted to wait for them to fall again, but the averages for a 30 year fixed rate mortgage have been climbing for the past three months. While no one can predict where rates are certain to go from here, we have ways to gauge the market and have a reasonable idea of where rates are trending. The messages coming out of the US Federal Reserve are that they will be increasing their bank to bank rates this year, and these rates have a waterfall effect on the mortgage rates that will be charged to home buyers.

What do rising rates mean to home buying?

The Federal Reserve’s statements and the Board Chairman Jerome Powel has further clarified that in order to control the record inflation, the Fed will likely have a series of rate increases throughout the year. It’s estimated that the purchasing power of a homebuyer, who relies on financing, is reduced by 13% for every 100 basis point increase in the 30 yr mortgage rate. These two facts, in combination, lead us to believe that locking in a mortgage rate sooner rather than later will likely be the better choice at present.

Gambling on interest rates going down is usually a wrong move no matter what the market for the following reasons:

  1. You can lose out on the home you wanted
  2. You may get priced out of listings you could have afforded
  3. You may be waiting on a lower rate that will never materialize

Rates are Still Low, and Housing is Still Climbing

Even if we see a quarter-point jump in rates every quarter this year, rising a total of 1%, the mortgage rate will still not be considered historically high. In the past 50 years, rates have been as high as the high teens (there was an average of 16.84% in 1981.)

In 2021 low rates and a reduced inventory stoked buyer demand causing price appreciation not seen before. The median home price in December was up 15.1% over the previous year and, according to Redfin, hit $382,840. While we will likely not see another 15% increase this year, we will see increases at a lesser pace. 

If you are thinking, well, maybe I should rent a bit longer, Redfin also found that rents have jumped even more, 20.5% in the same period, and the average rent is $440 higher than the average mortgage payment. This was because many buyers were priced out of the market and were forced to rent, reducing the available rental supply.

With the current low rates, home buying now makes sense. And there is also an expectation that more listings will be coming onto the market, which will slow the price increases. Another consideration is that with the current rate of inflation, potential home buyers may feel the pinch of other expenses that can reduce their housing budget. 

The Best Time is Now

While getting a low rate is always nice, it is essential to remember that if a house increases in value too much, it will be out of your price range even if the rate is zero. The current rates are still low and are expected to climb this year. With the price of homes still increasing, the house you can afford now might likely be out of your budget soon, so it is best to lock in a rate while they are still low and find that dream home you have been looking for.

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