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Should I Wait for Mortgage Rates to Drop?

Updated: Mar 1

Right now one of the biggest things that we hear from clients is should they buy a home now or wait until interest rates go down.

The answer to that question is that if you can afford to buy the house that you want or need at current interest rates, then I would challenge you to think about what is the cost of waiting. Here's an example. If you bought a $500,000 house today, at the current interest rate of 7.07%, and you compare that to buying that same house two years from now. For the purpose of this exercise, let's say interest rates at that time are 6%. First of all, that house is going to be worth more in two years than it is today. We know that historically in Charlotte, home prices increase about 4% a year. So if we use 4%, that means that this $500,000 house will cost you $541,800 in two years. If you buy the house today, your mortgage payment will be $2,680/month. If you wait two years to buy the house for $541,800 at 6% interest, then your payment would be $2,599/month. That's only a difference of $81/month.

But if you wait, then you're going to pay out of pocket another $8,360 in an increased down payment assuming that you put down 20% of the purchase price. On top of that, you're going to forego two years worth of the income tax savings that you might see, since mortgage interest property taxes are tax deductible for a primary residence in most cases. So here is the point; your mortgage payment will be $81/ month less if you wait two years to buy. But it's going to take you almost 28 years to recover the money that you will lost in terms of your increased down payment, and the reduced income taxes that you would have not realized.

So, the big takeaway is that it is more expensive to wait. Pure and simple. Additionally, if you buy the house today, and rates go to 6% in two years, then you can refinance at that time for a new mortgage at the 6% rate. And because you're going to be refinancing a lower principal amount, then your monthly payment is going to be $251/month less than if you buy the house in two years.

Will Charlotte Home Prices Come Down in the Near Future?

The number of home sales in Charlotte has decreased about 30% in the last year. So when you couple that with doubling interest rates, prices have to go down, do they not?

That would be a natural conclusion to make. But here's the rest of the story of what we're seeing in the Charlotte real estate market. The inventory of homes for sale right now is critically low. We're still at the lowest inventory level that we have had in recorded history. And so it's really a matter of supply and demand. So while home sales have come down 30% There's still more demand for homes than there is supply. And so home prices can't come down when there is more demand than supply. Until that changes until the number of homes that we have for sale on the market significantly increases. And no real estate economists that we follow are predicting there to be a significant increase in home inventory in the Charlotte market for years to come.

But aren’t home prices inflated?

We have heard clients and friends comment that they think home prices are inflated and that the housing bubble is about to burst. Check out this graph below.

If we look back at home prices over the last 33 years, and knowing that Charlotte home prices appreciate on average 4%/year. The green line on the chart shows you where home prices would be in any given year based on that 4% appreciation rate. If you look at 2023, actual home prices are only 7% above the trend line.

So what does all of this mean? Because demand is higher than supply, Charlotte home prices are going to continue increasing in coming years. Along with the tax advantages of homeownership, it will almost always make more sense to buy a home now versus trying to time the market. This conclusion assumes that you CAN afford to buy now, and that you are able to take advantage of the homeownership tax advantages.*

*Please consult a tax advisor for any tax-related questions about owning a home.

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