The Expert Podcast

Okay, so you're a potential homebuyer and you're thinking, well, now that the rates are up, the market's starting to pull back, there's more homes on the market, and people are not going to ask ridiculous prices for their houses. So maybe all I need to do is wait for interest rates to fall and I can get a house. Well, not so fast. As we've talked about before, this right now might be the best time to buy a house, and here's why. Interest rates are up certainly, house prices are up certainly; however, the pause in house prices going up that's occurring right now and maybe even a little bit of a drop on some types of homes might be a breather before home prices and mortgages go up even further.

There are a lot of people that when mortgage rates went to four or five percent said, "Well, I'm going to wait till they come back down to two or three." Now, they're wishing they took four or five. Four or five percent would seem cheap right now, but there are a lot of hidden factors behind the market that indicate that the net ownership price of a house is going to be higher even a year from now. The net ownership price is a combination of the home selling price and the mortgage interest rate, so your monthly payment will probably be higher in a year than it is now.

This article from Barron's reiterates what we've talked about for almost a year: that first-time homebuyers can't wait out the market. Right now is the best opportunity in several years to land a new home. That might sound counterintuitive—well, not if you've been watching this channel, it doesn't sound that way. The reason why is because there's still a huge number of repeat buyers who are looking to move. Remember all those home bidding wars where people were lining up—14, 15 people bidding on the same house? Well, those people that didn't get the house are still out there. They still want a house. At the same time, sellers have taken their houses off the market. Interest rates have caused homeowners to reconsider selling. Why downsize if moving from a three to six and a half percent doesn't help your budget?

Look, if you're in a house that is bigger than what you need, more expensive than what you need, and you want to downsize, well, you're not going to save any money. Even if you get half price for a house, if you double your mortgage rate, your payment's going to be about the same. At the same time that sellers are pulling back, first-time buyers are up, that rate is climbing. First-time buyers who can still afford to bid are in a better spot now than they have in months. The buyers that are out there have seen what the market has to offer, and the reality is home value growth is slowing. That's the key: home value growth. The price skyrocketing has slowed, but it's not really gone down. The prices aren't going down; it's just that growth is higher.

The reason why is because homes are expensive to buy, not because people don't want to buy, right? So as the prices go up, the same number of people are out there in the market wanting to buy a house. It's just that they've gotten more expensive, so less price appreciation is possible. That's a difference from 2008 and 2009. That's where nobody wanted to buy. People had two or three homes that they had purchased with no income, no verification, and they were just waiting for the market to go up to flip them. Now, everybody who's in a house is an owner. They're resident; they're living there, or they pay cash or have a high down payment so they don't need to sell. The price is high, so fewer people are buying, but the same number of people still want to buy.

That problem is going to get worse. There are millions of Millennials and Zoomers who have entered or are about to enter the prime home buying years. The demand side is still out there. The only reason why the number of homes being sold has slowed down is because that demand side—they still want to buy a house—they just are catching their breath over how much it's going to cost to own a house. It's not like fewer people want to be homeowners. Everybody still wants to be a homeowner; they just are trying to figure out how to wrap their head around what the payment's going to be.

Well, part of the psychological problem is people are expecting three percent rates. When everybody sees three percent for five, ten, or eight to ten years, you might think that's normal and say, "Well, let's get it back down to normal." Well, three percent was abnormal. That's not a normal rate. If you look back in the history of mortgages, most periods of time mortgages were about ten percent—eight, nine, ten percent. There were periods of time in the '80s they were almost 20, 17, 18 percent. So if we're at, let's say, eight percent right now, and really it's about seven, but it'll be eight soon, that's still in the range of normalcy for interest rates historically. So if you're waiting around for that lower rate, it's not going to happen. If you're waiting around for the prices to fall, that's not going to happen. They might not go up much more, but they're not going to crash.

Because as soon as there's availability, people are buying. In the meantime, remember: waiting isn't free. Rents are going up and you're paying rent to something that you have no equity in. It's just all going to the landlord. That makes it harder to save for a large down payment and an extra incentive to lock in a mortgage payment that you know is not going to go up. Look, every year that you live in a rental, your rent goes up, right? Five percent, ten percent every year. So next year, your rent's going to be ten percent more than it was this year. Even if you have to pay a little higher interest rate, a little more for the house, you're probably in better shape in three or four years.

Again, this all presumes that rates aren't going to go down and prices aren't going to go down. It's almost certain that rates aren't going to go down anytime soon. They're almost certain to go up. The Fed will probably raise rates two or three more times in the next 12 months, so the rates are going to go up, or at least stay the same—two, three, four percent, even five percent mortgages. Those you won't see again for five, six years, no matter what.

Now, the big question is, will home prices go down? If you believe in the reason for home prices—any price of anything is supply and demand—well, that answers your question. Because there still is a demand. The same number of people want to buy homes right now as they did a year ago, two years ago. In fact, there may be more people wanting to buy a house right now. The only reason they're not buying is because the price seems like it's too high and the rate seems like it's too high. That's a psychological issue. People will come to absorb that, get used to it, and just end up biting the bullet. They'll do the math on their rent, they'll do the math on where they're going to be in five years if they pay a mortgage payment and have some built-up equity, and they'll say, "Well, I'm better off doing this than paying $3,000 rent, $4,000 rent."

You should be the first one to do this because once more people get used to this idea and start diving back in, then there'll be more demand. Use this opportunity to get something to your advantage. That thing is not going to be a cheaper house or a cheaper mortgage. The advantage is you'll have more inventory available. You'll have more homes to choose from and more flexibility from the seller. You'll be able to do home inspections, mortgage contingencies, delayed closings, where a year, a year and a half ago, it was cash, no contingencies, end of story.

So, use this opportunity to see a little bit more inventory, a little bit better quality of homes, and beat the rush back to the market. Certainly, prices aren't going to go up 40 percent again; they can't. The affordability will be gone. But if you really look at the math, people can't afford a mortgage payment on a median home at the current rates. You might not want to, it might be higher than it was before, but it can be afforded. In fact, it's probably going to be less than what the rent is going to be for that same house. So homeownership still is an advantage month to month. The only downside, the only risk, is if you think house prices are going to crash, then stay out of the market. But there's a lot of data that says that won't happen again.

Nobody has a crystal ball. No one's going to say it's going to go up or it's going to go down and be 100 percent right all the time. But if you look at the actual facts, without an opinion, without an emotional opinion, if you just feel like it's gonna crash, there's nothing behind that in terms of fact. If you look at the data—how many people are out there wanting to buy a house, how much inventory is there, and how many new housing units are coming out to the market—then it's a no-brainer. It's very clear that home prices aren't going to crash. There may be a slight pullback, a slight easing. People that were asking stupid money for the house might not ask stupid money; they just might ask above-average money. Still going to be higher than it was in 2019.

Tell us what your thoughts are in the comments and about what the home price scenario of 2022 means to you.