FED up with interest rates? Consider this.
Interest rates - easily the most talked about thing in the last 12 months concerning the real estate market. Mainly because rates are doing exactly what the FED wants them to do, holding people back from purchasing homes. Now for all logical reasoning it would make sense to wait until you could get a lower rate before purchasing a home, but there is much more to consider. Waiting requires assuming that home prices won’t increase in the meantime. Month after month Kansas City has proven this will not be the case. (See last stats article)
You would also have to assume that you are the ONLY person waiting on interest rates to decline before purchasing a home. I challenge you to go ask any person you know who has been talking about buying a home and see why they are waiting. I promise at least half of them will say for interest rates. So, if interest rates were to decline (even the slightest) it would be safe to assume that we would have an influx of home buyers come onto the market. The inventory is the lowest it’s been in most people’s lives, so this would cause yet another extreme seller’s market in which every house that goes live demands top dollar, waiving of contingencies, and only the most qualified buyers will be able to purchase. This would drive up prices yet again to a point that is unsustainable. See the chart below from tradingeconomics.com.
Every time the interest rate drops, even a tenth of percent, we see an increase in mortgage applications directly following, and the fed is waiting for us to see these types of indicators (as well as many other things) slow before they pull rates back even the slightest.
So, I propose another situation. Instead of waiting for interest rates to come down to purchase a home, what if you decided to buy one in this market. Now, I understand that interest rates are drastically affecting affordability, and you might not be able to qualify for the same amount you could have last year. That’s a different topic. I am assuming you can afford the payment on the higher interest rate, which for most buyers is the case. If you were to buy the home now at the higher interest rate you could then take advantage of the many benefits of this market.
First, it is far less competitive of a market then it was even a year ago. So, buyers are getting to make offers with the contingencies they want and the protections they deserve. Second, you get to take advantage of the appreciation of the new home starting now. If you were to purchase a $500k home and home prices appreciate on the conservative side of 1-2% you would be looking at your home going up in value by $5-10k. Now you are gaining that appreciation, you didn’t have to go to war with other buyers to purchase your home, and lastly and most importantly you will have the ability to refinance when rates do come down!
The biggest thing to get over is knowing that 3% rates are not coming back. So, if for the next ten years interest rates average around 5.5% (which would be amazing and show that we have a healthy economy again) you would have the ability to refinance to a rate that makes your payment lower down the road. You might even be able to take advantage of that appreciation and get your PMI removed, lowering your payment even more. Ultimately, the spread between a 7% interest rate and 5% interest rate is not a whole lot. I would challenge you to take a look at your own situation and determine what makes the most sense for you.
If you would like someone to help you fully understand both home values and the potential lending market, please reach out to us. One of our amazing Kansas City Realty agents and our preferred lenders would be happy to sit down with you and really help you understand all your options.
