In a NutshellLow inventory, rising interest rates and high home values have made buying a home more expensive recently. If you’re trying to decide whether to buy now or wait, you’ll want to think about your credit, financial prospects, future plans and the housing market where you want to live.
Rising interest rates and home prices have put a damper on the real estate market in recent months.
In fact, only 17% of respondents think it’s a good time to buy a house, according to the January 2023 Fannie Mae Home Purchase Sentiment Index.
Whether now is the right time for you to buy depends on multiple factors, including your credit, down payment size, debt-to-income ratio, local housing market conditions and future plans.
Nationwide, low inventory, high home values and increasing mortgage rates have made buying a home less affordable. But home sales and price increases did decline across the country at the end of 2022 — a sign that the market could be stabilizing.
The Western U.S. experienced the biggest decrease in home sales and price increases, while the Midwest, Northeast and South had more-modest declines — an important reminder that inventory and home values can vary significantly based on where you live.
We’ll look at where mortgage rates and home prices seem to be going, plus factors to consider when deciding whether it’s the right time for you to buy.
- Will mortgage interest rates go down?
- Are house prices beginning to drop?
- When is the best time to buy a house?
Will mortgage interest rates go down?
After nearly a year of steady increases, mortgage rates seem to be leveling off — at least for now. Rates started increasing in the first quarter of 2022 when the Federal Reserve began raising the target range for the federal funds rate — the rate banks charge each other to borrow money on a short-term basis.
The Fed doesn’t set mortgage rates but increasing the federal funds rate increases the cost of borrowing for banks and other organizations. Financial institutions may pass the additional cost to their customers by raising the rates they charge.
The Fed raised the federal funds rate seven times in 2022 to help combat inflation, and the average rate for a 30-year fixed rate mortgage more than doubled. It peaked at 7.08% in the weeks ending October 27 and November 10 — its highest point in more than 20 years.
Since then, rates have slowly declined but are still nearly double what they were at the beginning of 2022. Whether rates will go down is impossible to predict.
Regardless of how rates fluctuate, maintaining solid credit and shopping around for a mortgage are the best ways to ensure you get the lowest rate possible. Rates vary among lenders and people with stronger credit generally qualify for lower rates.
Are house prices beginning to drop?
After sharply rising prices between 2020 to 2022, there are signs in 2023 that the housing market is beginning to cool. The median existing home value for all housing types increased by just 3.5% from November 2021 to November 2022 as demand eased and homes stayed on the market longer.
Mortgage purchase applications decreased by 40% year-over-over for the week ending December 4, 2022, according to Redfin data. It took 37 days for the typical home to sell — up from 28 days the prior year and 17 days from June 2022.
Despite these trends, inventory remains low, making it unlikely that home prices will decline significantly like they did in 2008 and 2009 during the Great Recession. If you’re thinking about buying, it’s important to look closely at what’s happening where you want to live because real estate trends can vary significantly from market to market.
When is the best time to buy a house?
Examining your lifestyle and financial situation can help you determine the best time to buy. Here are some things to consider.
Although zero- and low-down payment programs exist, you can borrow less when you have more money to put down, making your monthly payments more affordable. With a larger down payment, you’ll start with more home equity, and with conventional loans, if you put at least 20% down, you can avoid paying private mortgage insurance (or PMI). Applicants with larger down payments may also qualify for lower rates.
One of the most important factors lenders use to determine your interest rate are your credit scores. Applicants with scores in the mid-700s and above typically qualify for the lowest available rates. If your credit is on shaky ground, improving it could save you hundreds of dollars a month.
Let’s look at an example. If you get a $300,000 30-year fixed rate mortgage with an APR of 7%, your monthly mortgage payment would be about $2,000 (not including property taxes and homeowner’s insurance). But if you qualify for a rate of 6%, your payment would only be about $1,800/month.
In general, lenders want applicants to have a debt-to-income ratio of 43% or less. If your debt load is higher, paying off some of it may improve your chances of qualifying for a mortgage.
If you’re not planning to stay put, buying might not be your best option. Some experts recommending living in your home for at least five years before selling it. That’s how long it typically takes to build enough equity to recoup interest charges, closing costs, moving expenses and other fees you pay when buying a home.
Before buying a house, it’s important to decide what you can comfortably afford, based on what home values and interest rates are like now, not a year or two ago. If you decide to buy a house this year, rising rates may mean you can afford less than you would have previously.
Don’t forget to include closing costs, homeowner’s insurance, property taxes and home maintenance costs in your calculation.
If you’re on solid financial footing, buying may be a good option, especially if you’re planning to stay in your home for several years. But if your finances are shaky or you plan to move soon, it may be better to wait.
Try our home affordability calculator to see how much you may be able to afford.
Purchasing a house is a major decision with the potential to affect your financial health for decades. Here are some questions you can ask to help you decide if you’re ready to buy a home this year.
- How much money do you have for a down payment?
- How is your credit?
- How long do you plan to stay in your home?
- How secure is your job?
- How much can you afford to pay for a mortgage each month?
- How much inventory is available in your area?
- What is the average cost of a home in your area?