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Should I Wait to Buy a Home?

Updated: Mar 1

The media knows that Americans love to read about the housing market, so they write about this topic a lot.

In a recent Fortune Magazine article entitled, “The Housing Market is headed to a 1980’s-style Recession,” the author writes that housing demand is expected to remain low due to housing affordability weakened by higher home prices and interest rates remaining “elevated.”

While affordability has been weakened, home prices are not as out of line as the media would lead you to believe. Home prices in the US have historically increased by an average of 4% per year. The chart below illustrates home prices since 1990 and is overlaid with the 4% average appreciation rate. As you can see from the chart, current housing prices are just 7% above the trend line. So from a historical perspective, home prices are not out of line.

The article also references interest rates being elevated. That would imply that rates are higher than they should be. But when you look back at the last 50 years as illustrated below, the average interest rate is actually 7.81%. With current rates around 7.45% as of 11/3/23, we are in line with the average. They just feel elevated since we got used to interest rates being abnormally low for a long period of time.

Has housing affordability been impacted? Absolutely. And that means that some homebuyers will not be able to buy the house that they want. But the reality is that rates are not going to go down dramatically for quite some time. So right or wrong, Americans are ultimately going to have to get used to a new normal for the housing market.

Let me illustrate why it does not make sense to wait until rates come down. If you purchase a $500,000 home today with a 20% ($100,000) down payment, at the current interest rate of 7.45%, your monthly payment would be $2783/month. If you wait for 2 years to purchase that same house, it will now cost $540,800. If we assume that mortgage rates have come down to 6%, your 20% down payment will now be $112,360 which gives you a monthly payment of $2,594.

If this home is to be your primary residence, and if your adjusted gross income is $200,000, then you would pay $14,702 less in taxes due to the mortgage interest and property tax deductions allowed by the IRS.**

So while you would save $189/month by waiting to purchase the home in 2 years, it will take almost 12 years to recoup the 2 years of tax savings and the $12,360 of additional down payment. And the reality is that if you buy now, you can refinance your mortgage to get that 6% interest rate. If you do so and simply refinance the balance owed on your mortgage, your new mortgage payment will be $2,398/month which is $196/month lower than had you waited.

This illustration shows why it not make sense to wait. And this is a conservative example. Rates may not come down to 6% in two years. And it is very likely that home prices in Charlotte will increase faster than 4% annually when rates do start coming down. There is a lot of pent up demand just waiting for that to happen. And with inventory still remaining at historically low levels, this surge in demand is likely to increase prices at a higher rate which means the cost of that $500,000 is likely to be greater than $540,800.

** We are not CPA’s and cannot provide tax advice. Please consult your tax advisor to learn more about your specific situation.

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