Buy home now or wait for lower rates with more competition?
LOS ANGELES — Shop for a home now or hold out for the possibility of lower mortgage rates? That question is confronting many home shoppers this spring homebuying season.
Lower rates give home shoppers more financial breathing room, so holding out for a more attractive rate can make a big difference, especially for first-time homebuyers who often struggle to find an affordable home.
However, there’s a potential downside to waiting. Lower rates can attract more prospective homebuyers, heating up the market and driving up prices.
Acting now would likely saddle a buyer with a rate of around 6.9 percent on a 30-year mortgage. In late October, the rate surged to a 23-year high of nearly 8 percent, according to mortgage buyer Freddie Mac. Economists generally expect the average rate on a 30year mortgage to decline later in the year.
“If mortgage rates do in fact drop as expected, I would expect there to be more competition from increased demand, so that’s one reason to potentially act now,” said Danielle Hale, chief economist at Realtor.com. “And then those buyers, if mortgage rates do fall, would presumably have an opportunity to refinance.”
Gagan Hegde, a software engineer in Durham, North Carolina, is leaning toward the proactive approach as he looks to buy his first home.
Hegde, 29, worries that delaying his search would eventually put him up against others also looking for lower rates in a market that’s already plenty competitive.
Just recently, he matched the $450,000 list price on a townhome, but another buyer offered more than what the seller was asking.
Rather than dwell too much on mortgage rates, he’s now focusing on finding a three-bedroom, three-bath home he can afford. Once rates fall, he’ll look to refinance.
“I’m just completely being agnostic to the financing prices because I think if you start paying too much attention to it, there’s no clear answer,” he said.
Little consolation
The rock-bottom mortgage rates that fueled a buying frenzy in 2021 and early 2022 are long gone. While an average rate on a 30-year home loan of just under 7 percent is not far from the historical average, that’s little consolation to homebuyers who, prior to the last couple of years, hadn’t seen average rates this high going back nearly two decades.
Combined with a nearly 44 percent increase in the national median sale price of previously occupied homes between 2019 and 2023, elevated mortgage rates have made buying a home less affordable for many Americans.
A recent analysis by Redfin found that the typical U.S. household earns about $30,000 less than the $113,520 a year it needs to afford a median-priced U.S. home, which the company estimated was $412,778 in February. Redfin defines a home as affordable if the buyer spends no more than 30 percent of their income on their monthly housing payment. The analysis factored in a 15 percent down payment and the average rate on a 30-year loan in February, which was around 6.8 percent.
Lower mortgage rates would boost homebuyers’ purchasing power. Financing a $400,000 home with a 30-year mortgage with a fixed rate at last week’s average of 6.82 percent works out to about $215 more a month than if the rate was at 6 percent, for example. Monthly payments on the same loan two years ago, when the mortgage rate averaged 4.72 percent, would be $534 less.
Many economists expect that mortgage rates will ease this year, but not before inflation has cooled enough for the Federal Reserve to begin lowering its short-term interest rate.
Real estate agents from Los Angeles to New York say bidding wars are still happening, though not as often as in recent years in some places.
“Overall, the bidding wars are not nearly as extreme as they were in markets’ past,” said Tony Spratt, an agent with Century 21 Real Estate Judge Fite Co., in the Dallas-fort Worth area. “We’re still in a sellers’ market, but it’s much more mild than it was.”