Buy Now or Wait for Rates to Drop?
In the ever-fluctuating market of real estate, the decision to purchase a home can feel like navigating through a maze of uncertainties. One of the main factors influencing this choice is the current state of mortgage rates. As prospective homebuyers weigh their options, they come across the common question: is now the time to take the plunge into homeownership, or should we wait for a potential drop in mortgage rates? This short article focuses on market conditions, financial forecasts, and individual preferences to figure out if you should buy now or wait.
Mortgage Rate Predictions
Here are some expert opinions on mortgage rates:
Freddie Mac. “We forecast mortgage rates to stay above 6.5% through this quarter and next.”
Fannie Mae Housing Forecast. The 30-year mortgage rate will end 2024 at 6.4%, up from 5.9% in the previous forecast. The average mortgage rate will remain at 6.7% in Q2.
National Association of Realtors chief economist Lawrence Yun. “The budget deficit remains high, and the various inflation metrics remain above the comfort level. That means the mortgage rates will likely be in the 6% to 7% range for most of the year.”
For the week of 4/11, the average 30-year fixed mortgage rate us 6.88% according to Freddie Mac.
What About the Fed?
As anticipated, the Federal Open Market Committee (FOMC) unanimously decided to maintain the benchmark federal funds rate during its March meeting, marking the fifth straight meeting where the rate remains steady between 5.25% and 5.5%. This rate is the overnight borrowing rate for commercial banks and credit unions, it indirectly influences mortgage rates. Over the past two years, mortgage rates have surged to historic highs during the Federal Reserve's efforts to curb inflation through decisive interest rate policies. However, there's been a recent, decline in rates attributed in part to the Fed's pauses in rate hikes. Despite maintaining the projection of three rate cuts for 2024 in its latest economic summary, Federal Reserve Chair Jerome Powell emphasized that the timing of these cuts hinges on further inflation data analysis.
The Fed still projects 3 rate cuts in 2024, and the next FOMC meeting is April 30.
Do I buy now?
An important factor to consider is that historically in the long term, homes appreciate on average around 3-5% per year. This may not seem like much, but you cannot expect mortgage rates to decrease quickly, and if you are waiting for sub 5% mortgage rates, homes will be worth much more. Here is a simple mortgage calculator that takes into consideration tax and insurance.
Another important thing to remember is supply and demand! As a graduate of the University of Illinois with a degree in Econometrics & Quantitative Economics, I cannot stress this enough. If the mortgage rates were to drop quickly, you would see a large increase in the demand for housing. This increase in demand will likely cause the prices of homes to increase! We don’t know exactly how much of the increased prices of homes will be offset by the lower borrowing rates or the subsequent increase in supply.
Every person’s situation is different and there is not one correct answer for everybody. Here are some generally accepted guidelines for you to consider on your journey to home ownership:
Buy now if:
You need to move and you can afford it now
A high interest doesn’t scare you (Keep your credit up and consider refinancing in the future)
You plan on staying in your newly purchased home for a long time
Wait to buy if:
You cannot afford the home you need at today’s mortgage rates
You cannot find the right home in the market right now
You are having difficulty getting pre-approved for a mortgage
An important thing to remember is that you should not be trying to perfectly time the market. Sometimes expert predictions are wrong. The decision to purchase a home should be based on your financial capabilities, your personal needs, and your time.
Tips for Home Buying
Monitor mortgage rates. Mortgage rates are constantly changing, keep an eye on the current rates and consider keeping up with the Fed decisions.
Improve your credit history. When you apply for a mortgage, the lender checks your credit to decide your creditworthiness and interest rate. Generally, a higher credit score means a better rate. Before applying, check your credit to see where you stand and fix any mistakes with the credit bureau. This could boost your score and help you get a better rate.
Shop around and compare lenders. Explore offers from multiple mortgage lenders to discover the most advantageous deal for your situation. According to Freddie Mac, prospective buyers have saved over $1,500 throughout a loan's duration by obtaining two quotes from lenders. By seeking quotes from five lenders, they've saved approximately $3,000. Shop around!
Final Insights and Takeaways
While a rise in interest rates isn't exactly welcomed news, its not the end of the world. The current market still presents great opportunities for both buyers and sellers in the housing market. Although purchasing a home may come with a higher price tag compared to a few years ago, it is still worth it for those who need a home.
If you've already secured a fixed-rate mortgage, you're in a stable position during fluctuations in interest rates.
While it is good to aim for the lowest possible interest rate when obtaining a mortgage, waiting indefinitely to enter the housing market may not be the best choice. Ultimately, the decision to buy, sell, or refinance should be driven by your personal circumstances and goals, rather than reacting to shifts in Federal Reserve policies.
