To buy or not to buy
Is now a good time to purchase a home? If you are interested in buying a home in today’s market, you may be wondering if you missed the boat now that interest rates have been on the rise. The national average is 6.15%, as of January 19, 2023, according to the St. Louis Fed. This time last year the average was 3.55%.
There are many factors to consider when deciding to purchase a home. Your monthly budget is one of the most important factors for you to consider. The increase in interest rates has had a significant impact on a buyer’s buying power. For example, using
FHA financing, if a prospective home buyer has a monthly budget of $2,500, at an interest rate of 3.5% they could afford a home up to the purchase price of approximately $389,044.00. With an interest reflective of today’s interest rates, 6.5%, their purchase price would be maxing out at approximately $304,023.00.
There are pros and cons to every market cycle. For about two years we were in a very strong Seller’s Market, spanning from around May 2020 to May 2022. A Seller’s Market is a market where the sellers have the greatest leverage and control. They are typically able to sell their home for higher prices with terms that are more favorable to them. One of the indicators as to which market we are in is determined by the amount of monthly inventory there is on the market. Anything less than six months is typically a Seller’s Market, anything greater is typically a Buyer’s Market. Starting circa May 2020, while we were in the beginning phases of the pandemic shutdowns, the inventory on the market dropped, meanwhile the interest rates began to drop as well. The monthly inventory during that time there was generally less than a month’s worth, which was extremely low. This created the very strong Seller’s Market, generated by the shortage of inventory, and a surplus of eager buyers, armed with low interest rates and greater buying power.
Even though interest rates were dropping to historic lows, purchasing a home at that time was often expensive and challenging for many buyers. As it turned out, the low interest rates had some expensive side effects. While the money was cheap to borrow, the competition to purchase was fierce.
For the vast majority of homes on the market, buyers were faced with competing against many other motivated buyers, finding themselves having to pay several thousands of dollars over the appraised values of the already highly priced homes, in order to compete and win. Oftentimes, buyers would lose out on several homes, before finally coming out victorious in a bidding war. It was not uncommon for a buyer to pay $5,000 to $20,000 over the appraised value, in our marketplace. I’ve heard of experiences where buyers paid more than $100,000 over the appraised values, in some of the bigger markets around the country.
Since the interest rates began to increase in 2022, the marketplace has cooled. There is still a shortage of inventory, according to the Imperial
County Association of REALTORS® Multiple Listing Service, there is currently a little over a month’s worth of inventory. Traditionally that would still indicate a strong Seller’s Market, however, the rise of interest rates has slowed the demand from buyers. Part of this is due to the buyer’s perception of today’s rates, as well as the decrease in buying power. Historically, interest rates in the 6% range are good rates, but when compared to the superficially lower rates of the past several years, they seem high. Will they drop lower? I can’t predict that, however there are some advantages to buying a home today.
Now that the market has cooled, buyers have opportunities they didn’t previously have in the Seller’s Market. The rates are expected to continue to increase in 2023. I would suggest if you have a need or desire to buy a home, now would be a good time. If rates do drop in the future, you can refinance and capture the lower rate at that time. Yet, by buying today you don’t have to deal with many of the expenses and frustrations experienced by buyers in recent years. For the most part you don’t have to pay over the appraised value. Often, you don’t even have to compete with other buyers. Buyers now have some leverage to negotiate. Values haven’t plummeted, but they have softened, which is another plus buyers. Buyers may also be able to negotiate certain concessions from the seller that were previously out of the question. Another thing to consider is that if the buyer has the funds, instead of paying over the appraised value, they can use those funds to buy their rate down to one that is more acceptable to them. Buyers have options today that they did not just one year ago.