The increase in mortgage rates over the last several months has shifted the game for home buyers. Months ago, I discussed that payments were on average $1000 a month more expensive than in the middle of 2020. Since then rates are even higher,monthly payments are still rising and potential homebuyers have moved to the sidelines assuming that increasing costs will force real estate prices to drop and make things more affordable down the road. If this describes you, I have bad news, that’s not happening and you should restart your real estate search NOW!
Here is the reality, during the run from the beginning of the pandemic to early 2022 people were moving because they wanted either space, out of more urban environments or they realized that they could work from anywhere and would be able to choose their real estate situation from a wider scope of locations. Those forces still largely exist in most markets making demand higher than the supply of homes for sale.
Demand is being held steady or higher by several factors at the same time. First and most importantly we have the largest number of 28-35 year olds that we have had in a generation. Literally since 1990 or so. All the jokes from a few years back aside, they cannot live in their parents’ basements any longer. They are coupling off, having kids of their own and need a home. Depending on the exact math we are in year two or three of six to seven years of this. These folks will continue to demand housing.
Second, the financial market insecurity of the last couple of years has wealthy individuals content to keep owning multiple properties. Doesn’t matter much if it’s an AirBNB, or the property sits vacant until vacation time, they don’t want to give them up and those houses won’t be coming to market.
Third, single family home construction is at a level similar to that of somewhere around 2000 to 2003. As a country, we have not been building homes for individual people in numbers like we used to. In Texas, Georgia, Florida etc where people are moving there are way more multifamily apartment buildings than single family homes being built. Big builders and the investors in their projects are ready to sign people up for YEARS of renting instead of home ownership.
Finally, big companies have been buying single family homes in bulk. For the last few years, large hedge funds have been offering cash and flexible closing terms to home sellers. It’s appealing to the seller in this tight market but once that home is sold, it’s never coming back to the pool of homes for sale to the general public. The hedge fund will always retain it and rent it. If they sell down the road, it’ll be to another corporate owner who will just keep renting it.
So, for these reasons, home prices won’t be dropping in most markets. At least not enough to make a difference in monthly payment. So what to do…
Buy your house. I know payments are up and prices are not dropping. But here is a suggestion that I think will make sense and it’s the reverse of the way most folks are thinking. Instead of waiting for the real estate price to drop so you can get a lower monthly payment, which is unlikely for the reasons I mentioned, buy the house and wait for your financing costs to drop shortly down the road.
Here’s an example, if you buy a home in the Chicago market for $400,000 today and put 10% down, you can get a monthly payment of roughly $2050 at 5.5% on a 30 year fixed.
However, we know that everything else over and above housing has been getting more expensive due to inflation. You have to be living under a rock not to have heard this. However, the Federal Reserve (the Fed) is in the market raising the rate they control. I discussed here how this is not mortgage rates. When the Fed is successful in getting inflation under control, odds are about 100% they will cause a recession.
This recession will drive down interest rates. Not to 3% like they were for most of 2021, but think more likely 4%. At that point, maybe six months from now, maybe two years from now, you will be able to flip/refinance to a new loan. You’ll likely be able to drop your payment down a little over $300 mentioned above. But in addition you likely also would see an increase in value and would be able to remove/eliminate your PMI. When you add that savings you could see a total of $400 or so per month in savings.
It just makes more sense to reverse engineer this. Get the house, which is going up in value every day under your ownership and control ASAP! Then when it makes sense, get better financing. Tell your Mortgage Loan Originator (MLO) that this is your plan. Believe me, they will be on board. We would rather work with a proactive, professional customer twice (also, two commissions!). If they really know what they are doing, they should be able to make the second transaction much more affordable (low or no closing costs) as well. We share the details of how with our clients!
So that’s the general gist. Homes won’t be getting cheaper but financing probably will. Get off the sidelines and as they say in the business: Marry the house, but date the rate!
