The Expert Podcast

So you've been watching home prices, you've been stalking Zillow, you've been watching for sale signs, and you're trying to buy a house. You've been waiting for prices to ease and get some relief from the skyrocketing prices of homes. Now you're thinking, "Now's the time." Sellers are a little bit more flexible. They're allowing inspections on homes, they're allowing mortgage contingencies, there are more homes for sale, and there aren't 10 people putting in bids on the same house. So maybe now you can get a deal.

Maybe you can. The prices aren't really coming down too much; they're leveling off. A few sellers are starting to discount a little bit—$20,000 to $30,000—but usually, those are on homes that were overpriced to begin with. Properly priced homes aren't really discounted. But it doesn't matter. At least now there's some breathing room.

But there's another problem. There's bad news. The bad news is the interest rates are now higher. So if you're getting a mortgage, even though the home price might not be as extreme as it could have been, your interest rate now is instead of 2%, it's 7%.

What does that mean? Housing affordability is a calculation of not only the price but also the interest rate, because both of those things affect what your mortgage payment is going to be. Housing affordability now takes 35% of the median income to make a mortgage payment on a median home with 20% down. Now, most people don't have 20% down. You might have 10%, and if you have 10%, first of all, your payment's going to be higher. Plus, you have to pay private mortgage insurance, which jacks up your payment even more.

What does that mean? That's the highest payment-to-income ratio since October 1985. That was 40 years ago. So, 35% of your income—whatever you make in a month—35% is going to pay your mortgage payment with the current interest rates and the current pricing on a median home. If the rates were lower, it'd be a lot less.

And it's going to get even higher because this was actually calculated at 5.89%. This is a couple of weeks old. The rates are already approaching 7% and are probably going to go higher. More than likely, within the next 12 months, interest rates will be 8% to 8.5%. This is a lot higher than 2%. But interest rates have historically been even higher. In the 80s, when this last record hit, interest rates were 10% to 11%.

If we're already meeting the affordability record with rates only at 7%, imagine what that's going to be when they go up to 8%, 8.5%, or 9%. Or, if they get to where they were in the late 80s at 10%, it's going to be even worse because incomes didn’t go up that much.

So if you're really wanting to buy a house, even though affordability is high, now might be a good time to buy—but buy a cheaper house. You might have to downscale the amount that you're looking to spend on a house. If you're looking at a $400,000–$500,000 house, maybe look at a $300,000–$350,000 one.

Or, you could take a risk and wait a year and a half to see if the prices come down. But then your interest rates will be higher. So it's a catch-22. Remember, if you do buy a house—even at $400,000–$450,000 at a high rate—if the rates come down in a few years, you can refinance.

But now you have to take the risk that you're going to be able to afford those higher payments for a few years and take the risk that the rates will actually come down. They might. But what if they don’t? What if they stay 10% forever and you have a 9% mortgage? You're not going to be able to refinance.

So affordability is a big deal. It's not just the price; it's also the rate. And the prices may not come down because inflation is still driving the market.

Tell us what you think in the comments or what experiences you're having with home shopping and mortgage payment calculations.