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You Want Higher Mortgage Rates if You’re Shopping for a Home

September 21, 2023

For homebuyers in this market, yes, it is better for rates to be higher. This concept seems crazy, right? Hear us out—we will walk you through this thought process, supported by statistics.

We’ll talk about the competition to purchase a new home and why high interest rates can be your friend. We will also explain how the competition for homes drives prices up and why home prices aren’t coming down anytime soon. Finally, we’ll unpack the meaning behind “Marry the house and date the rate.”

Competition For Buying Homes

We know higher interest rates can make a big difference in the monthly mortgage payment. So, logically thinking, it makes sense to believe it’s best to buy a home when interest rates are low. This is a smart strategy, but unfortunately, everyone else thinks this, too.

At its core, the relationship between supply and demand is the driving factor behind price fluctuations. When demand for something is high, it shows that people are eager and willing to buy. Suppliers see this demand and realize that there is an opportunity to maximize profits, and they raise prices. Similarly, if demand and competition are low, suppliers need to lower prices to entice buyers. This fundamental economic concept is no different when it comes to the prices of houses.

When more people are interested in buying homes, sellers hold the power and can set their prices higher – this is commonly known as a seller’s market. In today’s market, that demand is exacerbated by an extremely low supply of houses. A smaller number of houses equals greater competition and higher prices being set by the sellers looking to maximize their profits.

Imagine this: A home hits the market today when mortgage rates are higher than desired. There may be only one or two interested buyers, so that house might sell for $250,000. If that same house is listed when the rates drop, all of the people who were waiting on the sidelines for this rate drop to happen before buying are now entering the game. That same house might now have six or more competing offers, some of which may go as much as $30,000 or more over the asking price.

By purchasing when interest rates are higher, you have the least amount of buyer competition. You are less likely to overbid, overpay, and make yourself sick over possibly losing a home you have fallen in love with.

It’s important to understand that you can always change the interest rate on a mortgage when rates come down. You can’t change the purchase price of a home once you’ve bought it.

Why Higher Interest Rates Help

According to Zillow.com, the average number of days on the market for a home in the US has increased. It is 33 days compared to 22 days in July of 2021. The percentage of homes selling above list price has dropped from 52% to 40% in the same time period.

As of mid-September 2023, the average rate on a 30-year fixed-rate mortgage is approximately 7.25%. This is the highest it has been in over 20 years.

So, in other words, higher interest rates seem to be slowing buyers and supporting a reduction of demand. This lower demand and competition creates a window of opportunity for homebuyers to re-enter the market and secure a home they love, knowing they can refinance later for a more budget-friendly monthly payment when rates drop.

If there is any reduction in mortgage rates, buyer competition will increase, days on the market will decrease, and the percentage of homes selling above ask will increase – further spiking home prices.

Why Home Prices Aren’t Coming Down

While some buyers have been sidelined due to higher interest rates, others have been sidelined by elevated house prices. The Freddie Mac House Price Index (FMHPI) reported that home prices in the United States rose by 17.8 percent in 2021. Home prices measured the highest increase because of the robust housing demand and record low mortgage rates of 2020 and 2021.

Home prices have historically shown consistent year-over-year appreciation. This, in part, is what makes real estate such a valuable investment. Unfortunately, the recent housing affordability crisis will likely continue, thanks to a meager housing supply. We break down the numbers and dive deep into the reasons behind the housing shortage in our blog titled When Will Home Prices Drop?. Essentially, new construction and the number of homes on the market are just not meeting demands. If no new building methods enter the mix, home prices may continue to increase for another ten years—until the baby boomer-owned homes start hitting the market.

Simply put, if you are looking to buy a home, prices are only going to continue to rise. So, if you find the home you want and can afford to buy it now, today is likely the lowest price that house will ever be.

Marry the House, Date the (Mortgage) Rate

You get one shot at the purchase price of a home, and if you overpay, you can’t get that money back until home prices increase beyond what you paid. This is why we like the phrase – marry the house, date the rate. This has become a way to explain the long-term to those new to homeownership.

When you buy a home, you are getting married to it. It is a long-term relationship. The mortgage, however, is a different story. You are merely dating your mortgage rate, and it is a short-term relationship. A homeowner can kick their interest rate to the curb whenever better options become available.

Here’s another way to think about it. You can always refinance a 7% mortgage rate to a lower one when rates come down. But if you overbid and overpay for a home by, say, $25k to $50k, you can’t get that money back.

In Conclusion

Mortgage rates are high, and housing inventory is short. While higher rates can seem intimidating, they have created a small window of opportunity where there is less competition and overpayment on homes. It may make more sense to buy now and refinance later rather than wait for rates to drop. Buying now can start you on your home investment journey and help you secure your financial future sooner rather than later.

"By being open and recognizing our strengths and weaknesses, we can see opportunities for growth and ways to help each other."

- Jayson Hardie on Growth

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