As we head into fall, we can expect the leaves to change and temperatures to drop, but we can’t expect interest rates to do the same. In fact, the cost to finance a home is higher now than it was earlier this year. While it may seem like a less-than-opportune time to buy, let’s take a closer look at what’s happening in the market and why you may want to reconsider waiting for rates to drop.
Colorado real estate is currently unpredictable. Depending on the price point and location, there are homes receiving multiple competitive offers and closing over asking, while others are sitting longer and having price reductions. However, the underlying market dynamics remain relatively constant - inventory is still low, and buyer demand is still strong despite the current rates. Of course, one of the contributing factors to our low inventory are the ‘golden handcuffs’ placed on many homeowners who purchased over the last several years. Their interest rates are locked in between 3-4%, so the idea of selling and then buying at a much higher rate has kept many would-be sellers on the sidelines. There are plenty of would-be buyers in that same boat, but there are several key reasons why this may actually be a great time to consider your next purchase…
Let’s first take a look at competition. Again, buyer demand continues to outweigh the current supply of homes on the market. There are certain areas and price ranges where competition is stronger, but for the most part, you currently have a better opportunity for negotiation and/or seller concessions, which were almost unheard of over the 2021-2022 frenzy. Obviously, the current rates make buying less attractive. However, when rates drop, even by half a percentage point, there will be a sharp increase in buyer competition. This could bring back bidding wars and result in more homes closing over asking. So, this could be a great time to find and purchase your dream home with more favorable terms, rather than waiting for rates to drop and competition to increase.
This leads us to our next key point - appreciation. Over the course of 2021-2022 when we witnessed a rapid increase in activity, one of the major results was a dramatic boost in selling prices and appreciation. Inventory was still low, and sellers were seeing an incredible amount of showings and offers, most closing over asking price with no contingencies or concessions, like we’re seeing more of now. So again, when rates begin to drop, the increase in activity will likely foster a similar environment where we see forced appreciation in home prices. While it may not be quite as significant as we saw in recent years, the moral of the story is that you will most likely pay a considerable amount more for your home if you decide to wait rather than purchase today.
Let’s say you’re looking to buy a home for $700,000 with a 30-year fixed mortgage at our current rates of around 7.125%. For the sake of this example, you put 20% down resulting in a loan amount of $560,000, which leaves you with a monthly payment at just under $3,800. If you wait for rates to drop, how could that change this scenario? If the 30-year fixed rate fell to 6.5% and buyer demand increased, that same home may now be listed for $780,000. With the same 20% down payment, your loan amount would be $624,000, leaving you with a monthly payment of almost $4,000. Sure, $200/month may not seem like a drastic change, but when you start to do the math over time, that’s $12,000 over five years, which you could’ve saved for home improvements, vacation, etc. And as we discussed earlier, you would have much less of a chance to negotiate or submit an offer with important contingencies once rates drop.
Another key point to keep in mind is refinancing. You’ve likely heard the saying, “marry the house, date the rate.” There can be some debate around this topic, but the fact of the matter is that if you buy now, you will almost surely have an opportunity to refinance at a lower rate in the future. Back to our example, if you purchased that $700,000 home now at 7.125% and rates lower to 6.5% in the next year, you could refinance and your monthly payment would be closer to $3,500, saving you about $300 a month. This is just an example, but it demonstrates the reality of buying now vs. waiting for rates to come down.
At the end of the day, the ‘right time to buy’ should always be determined by your individual situation. If you’re ready to make a move and have the financial means to do so, there is always an opportunity for you to succeed. If you wait for rates to drop, you could miss out on a more ideal situation for you and your family.