When is the Best Time to Buy a House?
When is the Best Time to Buy a House?
A common question we get as real estate professionals is, "When is the best time to buy a house?" The answer is counterintuitive and may surprise you.
The Current Housing Market
Today's housing market, on its face, is not one that most experts would deem great for buyers. With mortgage rates upwards of 7% as of this writing, more than double what they were in 2020, consumers' buying power is significantly impacted. For every 1% that mortgage interest rates rise, the monthly mortgage payment on a home rises by approximately 10%.
When rates increase significantly, it's super common for buyers to step back from the housing market, even if they were seriously searching for a home before rates rose. Whether for reasons of perceived affordability or just personal comfort, a common refrain we hear is, "We're going to wait to buy a house, interest rates are just too high right now."
This is a mistake. Buyers aren't wrong to be concerned about higher rates, but they're often missing the long term benefits they can achieve by buying when interest rates are higher. Would you believe that one of the best times to buy is when mortgage rates are high?
It is, and here's why.
Rising mortgage rates dampen the number of buyers seeking to purchase a home. For some, the higher rates price them out of the market altogether — they simply can't qualify for a mortgage given the increase in their estimated monthly payment. For others, they just can't stomach the idea of having a higher monthly payment after a prolonged period of sub-4% mortgage rates.
Either way, when interest rates are higher, the number of people you'll be competing against for a home is greatly reduced.
One of the key features of the housing market from 2020 through the first half of 2022 was the number and degree of bidding wars for homes. News stories abounded of open houses with lines around the block, home prices skyrocketing, and buyers paying more than six figures over asking price to win homes in multiple offer situations. When interest rates were so low that nearly everyone could afford to buy a house, it was common for buyers to compete against more than a dozen other offers and to escalate to extreme lengths in order to secure a home.
When interest rates are low, housing affordability is high. More people can afford to buy a home, so buyers face the greatest competition in a low interest rate environment.
More competition means that these stressful, and often risky, multiple offer scenarios are the norm for buyers, while sellers reap all the best terms and a ton of profit. But as interest rates rise, the competition ebbs and buyers benefit financially from having to compete with fewer people.
In a higher interest rate world, with fewer people to compete with, a buyer doesn't need to escalate their offer price six figures above the list price — in fact, they might even get to negotiate the sales price lower than list, or ask the seller for a concession to help cover their closing costs. These benefits simply cease to exist when interest rates drop, as buyers begin to flood the market again and create high demand.
"While it's almost always possible to refinance to a lower interest rate in the future, you can never go back and renegotiate the sales price you paid for a home." - Michael Lorino, Team Leader at Fidelis Property Group
Granted, your monthly payment will be higher as a result of higher rates - but that assumes you can get the same home for the same price regardless whether rates are low or high...and that historically is not what pans out in the real world. While it's almost always possible to refinance to a lower interest rate in the future, you can never go back and renegotiate the sales price you paid for a home.
Real World Example
We've already established that when rates are low, buyers re-enter the market en masse and are willing to compete fiercely for homes by offering the seller more money than they asked for. But when interest rates start rising quickly, buyers back away from the market and home sale volume tanks. But how much more might a buyer be paying per month if they bought when rates were 5.5%, compared to someone who purchased at 7% in a slow market?
Let's look at two home buyers looking to buy in the local market. Both are putting a 10% down payment and both made offers on homes listed at $745,000. However, Buyer A purchases a home when interest rates are only 5.5% and Buyer B purchases when rates are 7%.
When rates are low and multiple buyers are competing for the same home, it's quite common to see the sales price escalate well above the asking price - often as much as 5-10%. So Buyer A ends up having to escalate his offer to $800,000 after competing against seven other buyers, who all wanted to lock in a home loan at 5.5%. With his $800,000 purchase price and 10% down with a 5.5% interest rate, his new monthly payment is $4,088.
Buyer B, having purchased when rates are at 7%, is able to get the home for its asking price of $745,000. His new monthly payment is $4,460.
The difference between these two mortgage payments is $372. Buyer A, who paid $55,000 more for the home due to being in a competitive environment, took a permanent loss of $55,000 to save $372 a month. So how long would it take Buyer B, who only paid $745,000, to spend $55,000 in interest? It would take 148 months, or a little over 12 years! So Buyer B would need to make mortgage payments for 12 years before it stops making sense to have bought at the higher 7% rate. The likelihood of interest rates staying above 7% for the next 12 years approaches levels that are statistically impossible. In all likelihood, Buyer B, who saved $55,000 on purchase price, will be able to refinance within the next 12 months let alone 12 years!
Buyers have more leverage in a high interest rate environment and can use that leverage to create long-term financial gain.
Remember, it is always possible to lower your interest rate by refinancing - in the example, Buyer B saved $55,000 by purchasing when rates were less attractive, but will be able to refinance to a lower rate in a matter of months. In the end, Buyer B got the better of the two deals. This holds true because buyers have more leverage in a high interest rate environment and can use that leverage to create long-term financial gain.
More Cooperative Sellers
Another feature of the low interest rate environment of 2020/2021 is that buyers were also taking on substantial risk in the terms of their offers so that they could be as attractive as possible to the sellers. When competing against a dozen other buyers, it was common to see the winning bidder with zero contingencies in their contract.
Contingencies are the elements of a contract that are meant to protect buyers from unforeseen circumstances, such as not being able to obtain a home loan or dangerous findings in a home inspection. When you have contingencies in your home purchase contract, you have the ability to walk away from the purchase without financial penalty, or to renegotiate the terms of the deal with the seller in a way that better serves in your interest.
So in the period with low interest rates and extreme competition, it was commonplace to see buyers waiving all contingencies in their offers. In doing so, they were assuming all of the risk of the transaction and had little or no way of backing out of the deal. As if the home buying process wasn't stressful enough!
Sellers were thrilled with these offers, which presented zero risk to them, and most became very rigid in their expectations of receiving an offer well above list price with no chance that the buyer would walk away.
With higher rates and lower competition, sellers are realizing that buyers again have some leverage. There are fewer multiple offer scenarios, which opens the door to buyers writing offers that are more favorable to them - for example, by insisting on a home inspection contingency or an appraisal contingency, or both.
These contingencies create a more balanced transaction as they allow the buyer and seller to share the risks of the transaction, and most importantly, they give the buyer an opportunity to walk away from the purchase without a major financial or legal penalty.
In a balanced real estate market, this is what should happen. But in a low interest rate environment when money is cheap, the high demand creates a market that heavily favors sellers - a seller with ten offers on their home is unlikely to choose a buyer who wants any contingencies, because those terms present risk that the deal will fall through. But in a higher interest rate environment, with fewer buyers shopping, home sellers are much more open minded to contingencies and other compromises.
Again, you can almost always refinance to a lower interest rate down the line. But you can't go back in time and renegotiate with the seller about the terms of the deal. The opportunity to negotiate with a seller about home inspection repairs can lead to thousands of dollars in savings for a buyer.
When buying a home, the ideal scenario is one in which you have some negotiating power and can perform the due diligence you need to ensure the home is right for you - a higher interest rate environment helps with this by creating a more balanced real estate market and thus more cooperative home sellers.
Building Equity Starts Today
As potential buyers try to wait out higher interest rates, another common justification they give is that they'll "wait a year to save more money."
The challenge with this approach is that appreciation in home values almost always outpaces their yearly savings. In many markets, home prices go up between 2-4% in an average year. Let's say the average home price in your market is $500,000 and prices appreciate 3% over the next year. You will need to save more than $15,000 just to stay ahead of the equity you would have built by buying now.
There are certainly reasons to wait and save money - for example, many loan programs require a minimum down payment, so a buyer with little savings might need to wait in order for homeownership to be possible. But for many buyers, unless their savings rate is extremely aggressive, whereby their savings can outpace appreciation, they'll benefit more financially from the equity they start building today versus waiting another year or two.
Making the Most of Higher Rates
Higher interest rates, painful as they may be, create a market in which home buyers have more options. So how can you best take advantage of the current real estate market?
Buy During the “Off Season”
Most housing markets see the greatest buyer competition during the spring when temperatures are warmer. But there’s far fewer buyers shopping during the late summer/early fall and winter months - as temperatures drop and many families are preparing their kids for the new school year, most people focus on getting back to a routine rather than making big life changes.
So by shopping during the “off season” when interest rates are high, you’ll essentially get a 2-for-1 advantage — competition is less due to both higher interest rates and seasonality. You may have to load your moving truck while wearing a parka, but you’re far more likely to get a good purchase price on a property than if you wait until the hot market of springtime.
Be aware that, like competition, housing supply also drops during the off season - since fewer people are moving overall, there are simply fewer active listings to tour. Have patience with the process - although your house hunting may take longer, the goal is to find a home that meets your needs and the experience will hopefully be much more enjoyable with fewer buyers to compete with.
For many regions, the “off season” generally refers to the months between July and January. Talk with your real estate agent about what this timing looks like in your local real estate market and be open minded about moving based on that knowledge.
Explore Creative Financing
There are a variety of creative financing options that are more practical for buyers when rates are high and competition is low. In addition, lenders process fewer applications when interest rates are high, so they often have more time to talk you through your options and help identify the best scenario for you.
Lenders also become more creative in developing home loan programs designed to entice qualified buyers to apply, which can benefit those home buyers with more advantageous terms. Talk with your loan officer early about getting pre-approved for a home loan, and ask them what options they have for obtaining a lower rate.
Search for Assumable Homes
Certain types of government backed home loans, such as FHA and VA, are assumable by a homebuyer - that is, the buyer can take over the current loan balance and interest rate of the seller's home loan. An assumable loan can be a major boon for a homebuyer if the seller's interest rate is lower than what can be obtained for a new mortgage. Assumable loans are often difficult to do in hot markets because they take longer than average to close - but in a slower market, sellers are more amenable to them because any offer is better than no offer.
If you want to buy a home with an assumable loan, you’ll want to talk with your real estate agent and ask them to be on the lookout for properties that are eligible for this type of sale. You can also use a tool like Assume List to search for homes for sale that have assumable loans. In our experience, it’s not always advertised publicly when a home has an assumable loan, so a search tool like Assume List can be crucial in finding the right place since it doesn't’ rely on agent advertising.
Focus on the Long Term
Higher interest rates can feel particularly awful when we look back at the past few years of rock bottom rates. But it’s important to look at your strategic goals when considering whether to buy now or wait.
Besides greater competition, one of the biggest challenges when waiting to buy a home is that home prices tend to still appreciate in the meantime. So by waiting, you may get a better rate - but you’re also highly likely to pay a higher price as a result of housing prices going up during that timeframe.
Many people predicted - and even hoped - that rising mortgage rates would put a damper on home price appreciation and create a down market with lower prices. But because of the number of homeowners who now have home loans with sub-4% rates - over 60% of all homeowners nationwide - many people are reluctant to move.
The reduced inventory levels mean that home price growth has only continued, albeit at a more normal pace than it did in 2020. So don’t make the mistake of thinking that the market is going to decline due to higher rates, because that simply hasn’t held true.
However, most experts predict that rates will likely drop over the next 12 months, and with falling rates comes the opportunity to refinance later on. So if you can get a mortgage payment that is manageable for you now, does it make sense for you to lock in your dream home now and refinance later on?
You do need to consider the impact of higher rates on your monthly payments and financial situation. But don’t discount the idea of buying a home now if you can handle the mortgage, have your down payment, and the timing makes sense for you. You’ll start building equity sooner, and your monthly payment can decrease down the road if lower rates become available.
A Path to Owning
A phrase often repeated in real estate circles is, "You can't time the market." And although that advice is true, it's still important to understand the real estate market that you're in.
The current market of higher rates is one in which there are multiple opportunities for buyers to get value in their home purchase - whether that be through better terms, more reasonable pricing, or simply the chance to start building equity before lower rates lead to higher prices.
Another common analogy is, "The best time to plant a tree was 20 years ago. The second best time is today." This analogy also holds true in real estate: the best time to buy a home might've been last year or the year before that, but the second best time is today. By waiting, you lose out on appreciation and that same home will be more expensive next year.
In analyzing the best time to buy a home, we can look to one of the world's most successful real estate investors Warren Buffett. Buffett's position on the subject is clear: "Look at market fluctuations as your friend rather than you enemy; profit from folly rather than participate in it." In other words, the best opportunities in real estate are often created when market conditions scare off your competition. High interest rates are a condition that can be used to create that advantage.
In Summary, don't try to time the housing market or buy into the sentiment that now is a bad time to purchase a home. Some of the best deals can be found while other would be buyers sit on the fence. If you're ready to start house hunting, take your first steps now - it will offer you lots of advantages that only exist when rates are high.