Should I Buy a Home When Rates Are High?

Stop running from high interest rates

Running from high mortgage rates? Slow down there. This could be the best time to buy a new home in years.

If you are putting off your new home purchase due to high interest rates, you could miss out on some serious discounts. Interest rates are temporary. A home purchase is one of the most important investments a person will ever make. If the right home comes along, snag it regardless of the interest rate!

Fed seeks economic sustainability

In a Feb. 4, 2024 interview on 60 Minutes, news correspondent Scott Pelley asked Federal Reserve Chair Jerome Powell why The Reserve Board left rates unchanged in its first 2024 meeting. Powell said a downtrend in rates is coming, but not before the Fed monitors the United States economy long enough to ensure it can sustain an eventual 2 percent inflation rate. He said an interest rate decrease will come, but not until its clear the downward trend will continue with an interest rate break.

Inflation is down substantially since the Fed first took action in March 2022 after the largest 12-month increase since December 1981. The U.S. Bureau of Labor Statistics reported a 7.9 percent increase from February 2021 to February 2022. Consumer prices were up 8.5 percent in March. When Powell addressed the nation via 60 Minutes, inflation was down to 3 percent. The Fed’s target rate is 2 percent. The Fed Chairman said he is cautiously optimistic about the country’s economic future, but he doesn’t want to cut interest rates prematurely.

“We want to see more evidence that inflation is moving sustainably down to 2 percent so we have some confidence in that. Our confidence is rising, we just want more confidence before we take that very important step of beginning to cut interest rates.”

What is inflation?

Inflation is when prices go up gradually over time. Things get more expensive. That means that the money you have today might not be able to buy as much tomorrow. In real estate, inflation plays a big role. It can cause property values to rise, which might be good if you own property because it means your investment is worth more.

As we well know, inflation can get out of hand because wages and other earnings can’t keep up with a fast-burning economy. Inflation can lead to higher rent prices, making it tougher for people to afford places to live. Plus, inflation can affect mortgage rates, which determine how much you pay to borrow money to buy a home. So, when inflation goes up, it can change the entire landscape of buying, selling, and renting property. The Fed did not target the housing market with interest rate increases, but the decision to do so can certainly have a major impact on home affordability.

Several factors can influence inflation:

  1. Demand and Supply: When demand for goods and services exceeds supply, prices tend to rise, leading to inflation. Conversely, if supply outstrips demand, prices might fall, resulting in deflation.
  2. Cost-push Factors: Increases in production costs, such as wages and raw materials, can push up prices for goods and services. These costs are often passed on to consumers, contributing to inflation.
  3. Monetary Policy: Actions taken by central banks, such as adjusting interest rates and controlling the money supply, can influence inflation. Lowering interest rates and increasing the money supply can stimulate spending and potentially lead to inflation while raising interest rates can help curb inflation by reducing spending.
  4. Fiscal Policy: Government spending and taxation policies can also impact inflation. Increased government spending, especially if financed by borrowing or printing money, can contribute to inflationary pressures.
  5. Exchange Rates: Changes in exchange rates can affect the prices of imported goods and services. A weaker domestic currency can lead to higher import prices, contributing to inflation.
  6. Consumer Expectations: Consumer expectations about future inflation can influence their spending and saving behavior. If consumers anticipate higher prices in the future, they may increase spending now, contributing to inflationary pressures.
  7. Global Factors: Events and developments in the global economy, such as changes in oil prices, international trade agreements, and geopolitical tensions, can influence inflation rates domestically.
  8. Technology and Productivity: Technological advancements and productivity improvements can lower production costs and lead to lower prices for goods and services. However, technological disruptions can also lead to structural changes that impact inflation in various sectors.
  9. Government Policies: Government regulations and policies, such as price controls and subsidies, can directly affect the prices of certain goods and services, impacting overall inflation rates.
  10. Inflation Expectations: Expectations of future inflation can influence wage negotiations, pricing decisions by businesses, and investment behavior, affecting actual inflation outcomes.

These factors often interact in complex ways, and their combined effects determine the overall inflation rate in an economy. Powell said he doesn’t expect his board will wait until inflation is down to 2 percent to start cutting rates, but board members will look for a consistent decrease before it will consider bringing rates down.

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What goes up, must come down including interest rates

My clients depend on me to stay abreast of market trends (even when I don’t particularly love them). Interest rates rise but they will always fall. Home prices, not so much. So, armed with the knowledge you have, you can make an informed decision about your next home purchase.

Home prices do fluctuate with market conditions. High interest rates can indeed make the difference between being able to qualify for a loan and not qualifying. Increased interest rates have a direct correlation to higher mortgage payments. Buyers are hesitant to sign on the bottom line with out-of-site rates. Sellers are hesitant to sell because many are locked into mind-blowing low rates just a few years ago. So you would think the prices of homes would come tumbling down, right? Wrong. With so many existing homeowners waiting to make their escapes, inventory gets low, and home prices go up. We are seeing prices slip just a little due to high inflation, but many buyers out there recognize the investment opportunity that is presented here.

Bidding wars were all the rage throughout 2020 and 2021. The number we want to look at in this case is the “percentage of listing price.” Look, a home is worth what someone is willing to pay. You can list your home for sale at any price you want. That doesn’t mean it will sell.

If you are putting off your new home purchase due to high-interest rates, you could be missing out on some serious discounts.

~Joel Carson
President & Principal Broker
Utah Real Estate

Many factors are considered when professional real estate agents perform a comparative market analysis (CMA) or a “home valuation.” Sure, we look at comparable sales in the neighborhood where the home in question is located. We also consider the condition of the home, the age of its systems, curb appeal, size, features (or lack thereof), landscaping, and many others to come up with a solid listing price.

What we can not account for in determining worth is a buyer’s emotional attachment or the myriad reasons people form certain attachments to a home. Nothing about the way we value homes has changed. Valuing them and pricing them are two different stories. If demand is up and supply is down, we value a home the same way we always have. What does change is the amount people are willing to pay for it.

Why? Because mortgage lenders and investors want solid home values when they assume the risk of lending on them. Emotion has no bearing on the bottom line.

For example, lenders do consider:

  • comparable home sales
  • square footage
  • rooms – size, and type
  • lot size
  • age
  • condition
  • unfinished square footage
  • garage size
  • extras

Lenders do not consider:

  • whether or not your Aunt Margaret lived in the home and baked cookies for you every Wednesday
  • how conveniently close it is to your work
  • how much you love the peonies in the backyard
  • that you are finally returning to the neighborhood that built you

Real estate professionals are required to make adjustments for certain physical properties of a home to advise sellers of the best possible listing price. Banks want to be sure of their investments, so when they consider how much they are willing to lend on a home, they require a formal appraisal. A professional appraiser takes these considerations one step further with a much more detailed report (usually after a buyer has formally applied for a loan). The listing price and appraisal should be in the same ballpark. If an agent’s valuation is high, a low appraisal could cause issues with funding (mortgage companies rely on the appraisal for guidance). No one wants to lose a home (or a sale) that way.

In 2019 and 2020, the market seemed a little crazy. Demand shot up. Supply was severely lacking. Prices skyrocketed. Bidding wars ensued. You can pay what you want for a home (hey, it’s a free country) but you can’t always borrow what you want to pay. That put people with cash-in-hand in a premium position. 

The Wasatch Front Regional Multiple Listing Service (WFR-MLS) tracks housing market statistics. Two of the many statistics it tracks are:

  • listing price
  • sale price
  • the percentage difference between the two

In 2019 Utah buyers of single-family homes, condos, and townhomes paid a median of 97 percent to 99 percent of the listing price.

In 2020 Utah buyers of the same types of properties paid a median of 98 percent to 101 percent.

Then, 2021 rolled in with a bang. In January 2021 buyers were snapping up properties at a median 102 percent of the asking price, then 103 percent, then 105 percent of the asking price.

Remember, we’re talking about the median price here. That means, just as many buyers paid more than 105 percent as paid less. The median number is right in the middle. In many cases, buyers had to come up with cash to compensate for the amount of money a mortgage lender was not willing to risk.

Pay higher interest now and buy your home at a discount, or wait until rates come down and pay more for your home.

What happened to Utah home prices?

What happened to Utah home prices? Interest rates reduced demand, but low inventory increased value. From March 2022 to December 2023 the Fed raised rates 11 times. Don’t be afraid.

Homes are selling, but people are shying away from big purchases due to high interest rates. I’m here to tell you, that’s the wrong thing to do. Home values are still up, but sales are down, and that decreases demand (which, in turn, decreases prices). In our market, that’s temporary too.  

If you buy a $500,000 home that is discounted by 10 percent, you’ll save $50,000 from the get-go. If you get a mortgage at a higher interest rate, your payments will be higher than they would have been a year ago, but you won’t pay nearly as much in additional interest as you will save in the cost of the home.

What did I tell you a while ago? Interest rates will always fall. When they do, simply refinance. If your budget can tolerate a higher home payment temporarily, buying at a discount just makes sense. As rates come down, demand will go up and so will the value of your new home.

With $50,000 of savings, you can also buy down your interest rate with points or take advantage of one of the many programs designed to help you save when you buy a home. Click here to learn more about interest rate buydowns

When you refinance, you’ll save on interest and the amount of your payments, but your home will still be valued at $500,000. In many cases, that means instant equity.

I’ll say it again, interest rates are temporary.

Today’s homeowners can expect increased equity

Home prices are down, but your Salt Lake City home value is likely up. If you purchased a home one year ago, you likely still have significant equity. Sell your home, cash in on that equity, buy a discounted home, and your net profit/loss will begin looking very good to you. For buyers who have the cash already stashed, this is a solid plan.

If you want professional assistance mapping out your real estate future, let’s talk. Give me a call at 801-673-3333 and I will give you a list of options based on your unique situation.

Joel Carson - Utah's # real estate agent

Joel Carson is the President and Principle Broker of Utah Real Estate with over 30 years of experience buying and selling real estate in the greater Salt Lake City area.

Have questions? Call or text me at 801-673-3333

Article Last Updated: February 7, 2024

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