“Should I buy a house now, or stay on the sidelines for another year or two?” That’s the question on every cautious homebuyer’s mind right now. The current housing market has presented a unique set of circumstances. As you probably know, interest rates, along with home prices, have shot up in the last couple of years, leaving many buyers feeling uneasy about potentially signing on for a new loan.
With the Spring and Summer busy seasons of real estate upon us, interest rates in flux, and home prices starting to level off in some areas, this article will explore the current state of the market and offer insights for those considering a home purchase this year.
The Current State of the Housing Market
Home prices and Affordability
Rising home prices in the housing market have significantly impacted affordability for many potential homeowners in recent years. Consequently, first-time homebuyers often face difficulties navigating the market and securing a home that fits their budget.
Contrary to popular belief, the recent rate increases and economic strain have not caused home prices in markets like San Francisco and Seattle to drop significantly. The notion that under-asking offers will be readily accepted is, for the most part, inaccurate. In reality, average home prices have remained elevated without experiencing a crash.
The Impact of Rising Interest Rates on the Housing Market
The Federal Reserve’s recent actions to start raising interest rates has created uncertainty for borrowers and lenders alike. Interest rates impact monthly payments and the amount of interest borrowers pay over the life of the mortgage (see example below).
| Mortgage Amount | Interest Rate on a 30-year Fixed Rate Mortgage | Monthly Payment (Principal + Interest) | Total Interest Over 30 years |
| $400,000 | 3% | $1,686 | $207,202 |
| $400,000 | 7% | $2,661 | $558,216 |
When rates were lowered at the beginning of the pandemic, the goal was to support “spending by lowering the cost of borrowing for households and businesses.” Essentially, the move was aimed at keeping the economy moving and avoiding a recession amid widespread layoffs and business closures.
Interest rates play a crucial role in the decision-making process for home buyers, as lower interest rates make borrowing more affordable. With interest rates so low, demand went up and the supply couldn’t fill the demand, which caused prices to rise.
In 2023, the Federal Reserve is keeping a close eye on inflation and may raise interest rates several times throughout the year to combat rising prices.
Working with the right Real Estate partner can help you make sense of the market
Here at Flyhomes, our Agents, research-driven market analysts and the Flyhomes Transaction Team work together to deliver personalized data insights. Coupled with our agent’s local area expertise, they can guide you through the current market conditions, along with the general real estate process seamlessly. Hit “Get Started” below to learn more.
Approaching a Home Purchase in Today’s Market
Understanding Your Financial Situation
Before entering the housing market, homebuyers should have a clear understanding of their financial situation. This includes assessing their income, expenses, savings, and debt. If the idea of a financial check-up feels daunting, trust us, you’re not alone. Here’s some things to consider.
1) Income
This is the money coming into your account every month, so it’s a good place to start. Gather your current bank deposit, recent pay stubs, and last year’s W-2 or 1040 and Schedule C (for the self-employed). This information will help you compare your income to your expenses.
2) Monthly expenses
This is where the rubber meets the road. Understanding your monthly expenses is crucial for a financial check-up. Make a list of all your regular payments.
- Mortgage or rent payments
- Credit card payments, car loan payments and other types of monthly debt payments
- Expenses for dependents (children, parents, pets)
- Insurance premiums (health and health savings account, auto, life)
- Loans (student, auto, other)
- Utility bills (water, power, internet, cable, subscription streaming services, phone)
- Recurring payments (gym, autopay items, apps, memberships, charitable donations)
3) Monthly Debt Payments
Knowing your debt load, and monthly payments is important for your overall financial picture. Here’s some things you’ll want to keep track of.
- Mortgage balance
- Credit card balance
- Loans (student, auto, other)
- Overdraft or late fees incurred
4) Credit score
A good credit score is essential for securing a mortgage with favorable terms. Lenders use credit scores to assess a borrower’s creditworthiness and determine the interest rate and loan terms they will offer. You can get your credit score from a bank, your credit card company or a federally-sponsored website like freecreditreport.com.
Finding the Right Lenders and Choosing the Right Mortgage
Not all mortgage lenders are created equal. Homebuyers should research and compare multiple lenders to find the one that best suits their needs. Factors to consider include interest rates, loan terms, and customer service. Don’t be afraid to ask questions and negotiate better terms with prospective lenders.
In addition to lenders, there are various mortgage options available to homebuyers, including fixed-rate mortgages and adjustable-rate mortgages. It’s essential to understand the differences between these options and choose the one that best aligns with your financial situation and long-term goals. Consider factors such as the loan term, interest rate, and potential for future rate increases and decreases when making your decision.
Here’s a breakdown of different loan types you may find helpful.
Can You Buy Now, and Refinance Later?
When considering a real estate purchase it’s important to remember that it may be possible to refinance at a later date–which can offer you several benefits. Keeping the possibility of refinancing in mind can provide flexibility and options as your circumstances change over time. Some of the key reasons why you’d refinance include:
- Lower interest rates: If interest rates have dropped significantly since you initially took out your mortgage, refinancing could allow you to secure a new loan with a lower rate. This can lead to lower monthly payments and substantial long-term savings on interest.
- Shortening the loan term: If your financial situation has improved since taking out the original loan, you may want to refinance to a shorter loan term, such as from a 30-year to a 15-year mortgage. This can help you pay off your mortgage faster and save on interest costs over the life of your mortgage.
- Switching mortgage types: Refinancing can provide the opportunity to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or vice versa. This can help you take advantage of more favorable loan terms, depending on the current interest rate environment and your financial goals.
Aside from the positives, there are some drawbacks. First, you will need to qualify to refinance your mortgage loan. From appraising the house, to applying for a new mortgage and comparing loans, the process is complicated, and can end up costing you money. If you do it all by yourself, you will need to communicate with multiple parties, which takes time and effort.
What about renting for now?
How are rent prices affected by the current market conditions?
It’s easy to think that because you’re not taking out a mortgage, interest rates don’t affect how much you’ll pay in rent. But on the contrary, interest rates, inflation, and high demand have contributed to a rise in rent in the last two years.
Landlords and building owners have to cope with the rise in price of goods and services, and if they’ve taken out a recent mortgage on the building, they’re also dealing with high mortgage rates.
These costs get passed to their renters.
According to a Freddie Mac survey conducted in June 2022, 58% of renters saw their rent increase in the past 12 months, with 6% of those seeing an increase of more than 30%.
Higher interest rates on mortgages can discourage would-be homeowners from buying, so they jump into the rental pool—which is already a little full at the moment. And a higher number of renters increases demand which, in turn, increases rent prices.
Is it cheaper to rent or buy?
Generally speaking–if you’re paying rent, you aren’t building any equity. Staying in your rental rather than purchasing a home can mean you’re not covering the cost of sky-high interest rates, but whether it’s a buyer’s or seller’s market, buying a home means you may be able to start building equity as soon as you acquire the property–something that’s impossible to do as a renter.
Once you’ve paid down your mortgage a bit – tapping into home equity, or selling and pocketing a profit is a major benefit for long-term homeowners.
Homeowners can also use equity built up over time to make home improvements, or even put a down payment on a second property. It’s an excellent financial tool–plus, you can live in it! Good luck trying to live in a stock portfolio. 😉
High-Level Recap
The Current Housing Market and House Prices
The American housing market has experienced rising home prices, which have greatly affected affordability for potential homeowners, particularly first-time buyers. Despite expectations, factors such as rate increases and economic challenges have not led to significant drops in home prices in markets like San Francisco and Seattle.
If You’re Looking for a Yes or No Answer–Sorry, but There is No Perfect Time to Purchase a Home
The “perfect time” to buy a house varies for each individual, depending on their financial situation, goals, and the state of the market. Homebuyers should carefully consider their options and make informed decisions based on their unique circumstances. The important thing to remember, though, is that the sooner you purchase a home, the sooner you can start building equity.
Written by Zach Boughaffour
