Should I Buy a House Now?

Home prices are high and going higher. Is this a good time to buy a house?

We get this question a lot. Obviously, a lot depends on your personal circumstances. But, given how high home prices are now, should you wait for prices to go down?

To answer that, we should look at why house prices are up: 1) a buying frenzy caused by the Covid pandemic and 2) record low mortgage rates – fixed rate 30-year mortgages have at times fallen under 3%.

Will the Covid based buying frenzy continue for much longer? Probably not. There’s no particular reason it will end other than frenzies tend to be short term and they quickly clear out the people most interested in buying a home.

So, the key to house prices continuing to go up is interest rates. Will they stay low or go up? In a normal economy, rising inflation, as we are seeing now, should push up interest rates. But this is no normal economy. Instead, it is an economy that is highly dependent on low interest rates. In particular, the stock market and real estate markets are highly dependent on interest rates staying very low. Rising interest rates would be a huge negative for stocks and real estate.

So, the reality is that the normal pressure that push the Federal Reserve to raise interest rates are offset by the critical need to keep interest rates low, even if inflation moves higher. Hence, the Fed might try to raise interest rates, but it will quickly find that creates big problems with the stock and real estate markets. If the recent past is any guide, the Fed reacts quickly to problems by keeping rates the same or pushing them lower.

That means mortgage rates are likely to stay low, which will help maintain current or higher home prices. The frenzy will fade and home prices very unlikely won’t rise as fast as they did in the last year. But due to low interest rates, they likely won’t fall much either.

How to play this situation of high prices that likely won’t come down much in the near future? Get a fixed rate mortgage and minimize your down payment. If prices continue to rise, great.

However, if and when (and we definitely think it is only a matter of when), interest rates rise, the fact that you have a low interest fixed rate mortgage will shove the risk of rising interest rates onto the bank. That really means you are shifting the risk to the government, given that they guarantee most of the mortgages made in this country.

With your monthly payment fixed and your income rising with inflation to some extent, it actually becomes cheaper and cheaper to make your mortgage payment. In fact, if we get high lasting inflation, which we eventually expect, that monthly fixed rate mortgage payment will becomes cheaper and cheaper to make year after year.

With that in mind it’s also worth remembering that taking on a lot of debt to buy a house you can’t really afford is always a risk if you have to sell quickly. Prices can fall after you buy a house and you will take a loss. Or, if your income is unstable, you are taking a risk that you can’t make the mortgage payments. These are always the risks in any housing market. They are simply heightened in a high-priced market.

The bottom line is if you are waiting for big short-term fall, don’t count on it. However, if you are waiting for the current frenzy to cool a bit, that’s possible, but again, there is something of a floor on current home prices due to low interest rates that are not likely to change much in the near future.

Finally, all real estate is local, so while national issues like interest rates are important, they are by no means the only factor in determining prices.