The Cost of Waiting in the U.S. Real Estate Market

With the ongoing conversation about interest rates in the U.S., many potential homebuyers and investors are hesitant to purchase properties, hoping for a decrease in rates. As of June 2024, the average 30-year fixed mortgage rate is around 7.5%, according to Freddie Mac. This article explores why waiting for interest rates to drop can lead to higher overall expenses due to the rising home prices in major U.S. markets.

The Role of Interest Rates in U.S. Real Estate

Interest rates play a crucial role in the real estate market, directly influencing the affordability of homes. The Federal Reserve sets the federal funds rate, which indirectly affects mortgage rates. Since 2020, interest rates have fluctuated significantly, dropping to historic lows during the pandemic to stimulate the economy and then rising as the economy recovered and inflation concerns grew.

In 2020, mortgage rates hit lows of around 3%, leading to a surge in home buying and refinancing. However, as the Federal Reserve increased rates to combat inflation, mortgage rates climbed, reaching around 7.5% in 2024. This rise in interest rates has affected home prices and market dynamics. Higher rates generally decrease home affordability, reducing demand and cooling price growth. Yet, due to limited housing inventory and sustained demand, home prices have continued to grow in many areas.

Home Price Growth in Major U.S. Markets

To illustrate the cost of waiting, let's look at some data. According to recent reports from Zillow and Realtor.com, here are the year-over-year home price growth rates and dollar amount increases for 2023 in some major U.S. cities:

These growth rates and dollar increases reflect substantial rises in home prices within just one year, significantly impacting the total cost of homeownership.

The True Cost of Waiting for Lower Interest Rates

Here’s a comparative scenario:

Scenario A: Buy Now

• Home Price: $350,000
• Downpayment: $87,500
• Loan Amount: $262,500
• Interest Rate: 7.5%
• Monthly Payment: $1,835.44

Total Payment over 10 Years: $1,835.44 x 12 x 10 = $220,252.57

Scenario B: Wait for Rate Drop

• Projected Home Price: $367,500 (5% increase)
• Downpayment: $91,875
• Loan Amount: $275,625
• Interest Rate: 7%
• Monthly Payment: $1,833.74

Total Payment over 10 Years: $1,833.74 x 12 x 10 = $220,048.80

Comparing Payment Savings to Price Increase If you wait and the home price increases by 5% to $367,500, the increase in purchase price is $17,500. The savings in monthly payments over 10 years ($204) do not compare favorably to the difference in purchase price ($17,500).

Making Informed Decisions It’s important to consider the overall investment and monthly payments rather than focusing solely on interest rates. Refinancing options exist, allowing homeowners to benefit from future rate drops. Thus, securing a property now and potentially refinancing later can be a more financially sound strategy than waiting for rates to decrease.

Refinancing

It's also important to note that refinancing is always an option. If interest rates drop significantly in the future, homeowners can refinance their mortgages to benefit from lower rates. This flexibility means that the immediate priority should be securing the property before prices rise further, rather than waiting for a potential rate drop.

Strategic Considerations

There are, however, specific scenarios where waiting for lower interest rates might make sense. If you already own a home with a low-interest mortgage and do not need to cash out equity, it might be wise to wait. But for new buyers and investors, the cost of waiting often outweighs the benefits.

The Takeaway

The real estate market is dynamic, and waiting for interest rates to drop can be a costly strategy due to the consistent rise in home prices in major U.S. markets. By focusing on securing your investment now, you can take advantage of the current market conditions and the option to refinance in the future. Remember, the numbers that truly matter are the overall investment and monthly payments, not just the interest rate.

The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.