During the pandemic, how sales exploded. The combination of a huge number of companies transitioning to remote work, along side historical low rates at the beginning of lockdowns, coupled with supply chain issues that held up much of the new home construction created a perfect storm that spiked demand and constrained the supply of single family houses. This resulted in homes in many areas to double in value Year over Year. But how long can the prices last at those historic highs, and is now a good time to buy with Mortgage rates rising?
One major indicator that home prices are likely to start falling is the number of Existing Home Sales, which have dropped 5.4% in 2022, despite prices continuing to rise. This trend is across all US regions. Many speculate that the reason for the rising prices is a lack of inventory, with many people having bought at the peak of the pandemic being unwilling to sell as any new purchase would be at today’s much higher mortgage rates. Even purchasing a cheaper home today could result in a much higher monthly payment. See the following example:
Looking at a typical mortgage of $250,000, at today’s current average mortgage rate of 7.406%, your monthly payment would be $1,732 (not including home insurance, real estate taxes or PII if required for your loan). Over the term of a 30 year loan, that would come out to $374,337 in interest paid, or $624,447 total cost of the loan.
Let’s compare that to the same $250,000 loan at 2.77% (the national average in November 2020). The monthly payment would come out to $1,023, with just $118,422 in interest, for a total cost of the loan of $368,422, a bit over half of what you would pay at the current mortgage rates.
So is now a good time to buy? As with all things financial, this is a highly individual question. Broadly speaking, the combination of high rates and high home prices makes it less than ideal to buy when considering the long-term investment. Coupled with declining home sales and other market indicators, its likely the current price bubble is about to burst so if you’re able to put off the purchase, you may be able to grab that dream home for considerably less money within a year or two.
On the other hand, the Fed has recently signaled their intention to continue increasing rates to try and combat inflation, so its possible rates will rise further in the near future which could increase your total expenditure on a home, even if you buy it for a cheaper price. Weigh your options, budget and needs, and always shop around for the best deal that fits your situation.