After two years of rapidly rising housing prices, many hopeful homeowners have been left dejected and at a loss as to whether they’d ever afford a home. Now, as interest rates increase and the economy pulls back, housing prices are again falling to an affordable level. This has many first-time buyers wondering if now is the right time to strike.
Despite lower prices, anyone looking to purchase a home should be aware that higher interest rates could equate to an overall more expensive mortgage. And, as the national housing supply continues to rise, it could further lower the value of existing homes. Therefore, it’s important for buyers to weigh the pros and cons of the current market before making any major financial decision.
Higher Interest Rates May Lower Prices but at the Cost of Higher Mortgages
In light of rapidly rising inflation throughout the United States, the Federal Reserve has moved to raise interest rates to keep the economy in check. At the time of publishing, rates have increased to around 4% with many analysts expecting them to go up even higher in 2023.
The effect of this policy move is intended to lower inflation and, therefore, the overall price of consumer goods but, it comes with a drawback. While higher interest rates may help to keep inflation in check, they will also make mortgages more expensive for buyers.
In fact, according to CNBC, “a 1 percentage point rise in mortgage rates would add about $100 to the monthly payment on a $250,000 loan.” This would put even more strain on already stretched budgets and could cause many would-be buyers to reconsider their plans to purchase a home.
A Higher Supply of Homes Could Lead to Lower Housing Values
On the other side of the equation, there are early signs that the construction industry could overcome the United States’ current housing shortage. According to both CNN and Bloomberg, the US market saw higher-than-average building statistics in both June and September, indicating that the industry is beginning to catch up to the current demand.
This could be good news for buyers in the short-term as they may have more options to choose from but, in the long-term, it could lead to a decrease in the value of homes. On the one hand, a higher supply of homes could lead to more competition and, therefore, lower prices.
On the other hand, if the demand for housing doesn’t increase at the same rate as the supply, it could lead to a decrease in the value of homes. This is something that potential buyers should keep in mind as they weigh their options in the current market.
Hopeful Buyers Should Approach with Caution
The current state of the housing market is one of mixed signals. On the one hand, prices are falling to more affordable levels and the construction industry is beginning to catch up to the current demand. On the other hand, interest rates are rising which could lead to more expensive mortgages and a higher supply of homes could lead to lower values.
For hopeful buyers, the best course of action is to approach the market with caution. Work with a real estate agent to get a better understanding of the current market conditions in your area and be sure to get pre-approved for a mortgage before making any offers.
Understandably, many young families and first-time buyers are hopeful that the current state of the housing market could lead to their first home. However, it’s still early days as the market adjusts to higher interest rates. For now, it’s probably best if buyers wait a few more months and decide whether to purchase in the new year.