The conventional wisdom suggests that now is a terrible time to buy a home.
In September, the average rate for new 30-year mortgages hit 6.29% according to the St. Louis Federal Reserve, almost triple their 2021 low of 2.65%. At the same time, the median sale price for houses continues to climb, most recently reaching $440,300. While the market’s rate of growth has slowed down, houses continue to get more expensive.
So with asking prices still on the rise and loans nearly three times more expensive than they used to be, it’s no wonder many are advising against buying a house at this junction. It makes a surface level sense. Rising interest rates will make monthly mortgage payments considerably more expensive, so buyers should wait until those prices come down.
Except financial and housing experts say it isn’t that obvious. In fact despite or even because of rising mortgage rates, now might actually be an excellent time to buy a home. If, and this is a very big if, you intend to stay there for a while.
Marry the Mortgage, Date the Rate
Realtors and mortgage brokers have a nifty little saying: “Marry the mortgage and date the rate.”
The idea is that every mortgage loan is built of two parts: the principal and the interest. The principal is the amount you borrowed to pay for the house, generally the price of the house less your down payment. This is the amount that you have to pay off one way or another. The interest is the rate that the bank charges to lend you that money, and that’s much more flexible. Unless your mortgage has a prepayment penalty, which is relatively rare, you can refinance at any time.
As a result, housing experts suggest that home buyers should look at high mortgage rates as a temporary condition. You might buy a home with a 6% interest rate, but once rates come back down you can always refinance on better terms. In fact, knowing you can do so, banks will sometimes renegotiate the terms of your loan just to prevent you from taking your business elsewhere.
This lets buyers take advantage of the conditions generated by a high-interest market, when housing prices tend to either slow down or drop. That’s by design; it’s part of the reason that the Federal Reserve raises interest rates in the first place. As mortgages get more expensive, home buyers have to dedicate more of their budget to interest payments and less to the purchase price of the house. To a degree this is already happening. Although housing prices continue to rise, their rate of increase has slowed.
The reverse is true of low interest environments. With buyers dedicating less money to their loan, they can commit more money to the purchase price. This bids prices up, which contributed to the staggering rise in housing prices over the past 10 years.
The upshot of marry the mortgage is this: You can’t renegotiate your purchase price, but you can refinance your loan later. As a result, high-interest environments can actually be an excellent time to buy a home. Even though that 6% interest rate increases your monthly payments, the underlying price you pay for that house will go down. You will have to pay more for a while but when interest rates drop you can refinance, ending up with both lower principal and interest. In the long run you can get better monthly payments than you would have if you had bought during a low interest environment.
The catch of course is the interval. It can take months, or even a couple of years, for interest rates to go back down. You have to be willing and able to accept higher payments in that short term, knowing that it will save you money in the long run. For home buyers strapped for cash or who don’t plan on staying very long, this may not be a good plan.
But if you have found the house you love, high interest can be your friend.
Inflation Is Also Kind of Your Friend
Many of the same folks that warn against buying houses during high mortgage rates have also warned against buying a house during an inflationary period. There is some basis for this. High inflation is inherently destabilizing and can lead to many questions about future finances, a recession and a potential job loss. Indeed, many believe that the Federal Reserve is engineering a deliberate recession in order to cool down the highest prices in 40 years.
But, while all of that is true, it’s also important to remember that inflation can have some upsides. Specifically, during an era of high inflation the value of previously held debt declines relative to the value of money.
What this means for housing is that inflation can, and again that’s a very big “can,” make a mortgage more affordable than continuing to rent. Landlords adjust their rent every year, which allows leases to keep up with inflation. The market for apartments does not get noticeably cheaper or more stable as time goes on, quite the opposite, and as a renter you are always in this market. Every year you must negotiate a lease, whether it’s with your current landlord or a new one, which allows them to adjust their terms to current prices.
Fixed debt doesn’t work that way. Once you negotiate the purchase price for your house, both you and the bank are stuck with it. During a period of high inflation this can work in your favor, as the value of that debt is eroded year after year. The bank can’t adjust your principal to keep up with the value of money, and with a fixed rate, the same is true of your interest. So as wages and salaries increase to keep up with inflation, that mortgage will mean less relative to your income each year.
Now, this is of course not a full-throated declaration that inflation is a positive good. Economists worry about inflation for many excellent reasons. Instead, it’s a suggestion that, as long as inflation is continuing, it might give potential home buyers an early opportunity to cut the value of their debt.
The Bottom Line
Rising interest rates tend to scare home buyers out of the market, but many experts suggest that the opposite should be true. For the right buyers, high interest and high inflation may make this the perfect time to buy a house.
By: Eric Reed I Smartasset.com I October 2022