Even with High Interest Rates, Now May Still Be the Best Time to Buy a House
The real estate market has been on a wild ride for the last two years — and the ups and downs are far from over.
Interest rates for 30-year mortgages are now hovering around seven percent, which is making buying a home wildly expensive right now. On the plus side, higher interest rates should mean less competition at showings and open houses, fewer bidding wars, and, ultimately, lower prices. But is all that actually happening?
“The market is hands-down experiencing a fundamental shift,” says Haley Cutter, a real estate agent in Massachusetts. “Across the board, the interest rate hikes have buyers proceeding with caution when it pertains to purchasing homes.”
I wanted to better understand what some of these macroeconomic factors actually mean for today’s buyers who are on the hunt for a new home, so I checked in with a handful of real estate experts. Here’s what they had to say.
Cash Is Still King
Interest rates — which the Fed continues to increase in an effort to halt inflation and, hopefully, head off a recession — determine how expensive it is to borrow money. High interest rates mean that it costs more to borrow money to buy a house. Because of that, buyers who don’t necessarily need to borrow money are opting to forgo mortgages altogether and pay in cash.
“Over 75 percent of our fall transactions are all cash,” says real estate agent Jared Barnett.
Sellers Are Slow to Catch On
It’s basic supply and demand: During the pandemic, interest rates were low, which made it cheap to borrow money. This, in turn, meant there were more buyers out searching for houses (high demand). Coupled with a limited supply of available homes, this drove prices through the roof (pun intended).
Now, because of high interest rates, there are fewer buyers looking. In theory, prices should drop — and they have, to a degree. For the four weeks ending Oct. 2 (the most recent data available), the median asking price was down seven percent from the record high in May. But at $373,725, it’s still seven percent higher than it was a year ago, per Redfin data.
Many sellers still remember the days of crowded open houses and bidding wars, and they aren’t rushing to lower their listing prices or accept lower offers just yet.
“Some sellers understand that the market has changed and they don’t necessarily have the upper hand,” says real estate broker Bill Kowalczuk. “Some sellers get it, but many do not.”
Another factor at play: Sellers are also dealing with high interest rates, just like buyers are. They may feel they need to sell their current home for top dollar in order to afford a new one, hence their decision not to budge on price. (Interest rates are also leading some sellers to simply stay put for the time being, which means there’s a lower supply of available homes on the market, which is also helping to keep prices high.)
“Sellers are holding firm and are resistant to reduce or meet in the middle, should they get an offer that is not to their satisfaction,” says real estate agent Todd Maloof.
This isn’t great news for buyers, since they’re already paying much more in interest than they would have a year or two ago, so they really need prices to come down in order to be able to afford a home.
The good news is that the market will eventually correct itself, and sellers will have to lower their prices or risk having the property stuck on the market for ages. It may just take some more time.
Even Cheap Houses Are Pricey
Because of how high interest rates are right now, buyers who are already working with a small budget have an even narrower selection of homes they can actually afford. With a seven percent interest rate, even relatively cheap or affordable houses quickly become unattainable because of the added cost of interest.
“Buyers have finite incomes, and the higher financing costs add to their total carrying costs, reducing the amount they can afford to finance and, thus, the amount they can pay for a unit,” says real estate broker Rachel Lustbader.
Buyers Can Still Get In — And Now May Be a Good Time
This may all seem like a lot of bad (or, at best, lukewarm) news. But buyers definitely have the upper hand when it comes to negotiating right now. Homes are sitting on the market twice as long as they did this spring, according to data from Redfin, so motivated sellers who really need to move may be willing to offer buyers some concessions.
Bottom line: If you can get approved for a mortgage or you happen to have a chunk of cash, you may want to consider buying right now. Of course, the decision varies greatly from person to person, based on each individual’s unique situation. But if it’s something you’ve been thinking about for a while, now may finally be the time to pull the trigger.
“Buyers have an opportunity they have not had for over two years: to get into a home,” says Nicole Rueth, a Denver-based lender with OneTrust Home Loans. “Buyers can negotiate on price, inspection, and concessions.”
Yes, you will pay more in interest. But as Rueth wisely points out, interest rates change and you can refinance into a mortgage with a lower rate down the line. On top of that, if you wait until rates do decrease, you may once again be battling tons of other buyers.
“When the economy shifts into a recession — and it will — rates will go down,” she says. “Buyers today can be snuggling in their own warm home and refinance into a lower monthly payment versus competing with other buyers who come back out when rates do drop.”