Hi, I’m Sean Balcom, a lending professional with over 20 years of experience located in Southeast Michigan. Lately, a question I hear often is: “With high inflation, low inventory, and interest rates higher than they used to be pre-March 2022, is it still a good time to buy a home?”
Real Estate Inventory Challenges: What You Need to Know
The current real estate market continues to experience a shortage of homes for sale, and this trend isn’t likely to change soon. Let’s look at the factors at play:
- Interest rates & inventory: As mortgage rates begin to decline, more homeowners may be inclined to sell their properties. However, many of those sellers will also need to buy, limiting the amount of true net inventory. While rates are starting to ease, it’s not expected that inventory will grow significantly from this alone.
- New construction: There’s hope that homebuilders will find ways to use advanced technology to build homes more affordably. However, despite some promising developments, we haven’t seen widespread innovation that has meaningfully impacted construction costs.
- No financial crisis in sight: Unlike the 2008 housing crash, where poor mortgage lending practices led to widespread foreclosures, today’s market is built on much stronger foundations. Lending standards are far more stringent, and homeowners are sitting on a record level of home equity. This means we’re unlikely to see a massive surge in inventory due to financial distress. Even in the case of a job market downturn, many homeowners would prefer to sell their homes and retain equity rather than face foreclosure.
Interest Rates and Inflation Explained
Inflation has been a key driver of economic uncertainty. In June 2022, inflation spiked to 9%, causing mortgage rates to rise significantly. The good news is that inflation has dropped to around 3% is heading toward the Fed’s target of 2%. As a result, mortgage rates are starting to trend downward. However, many buyers are still hesitant, expecting mortgage rates to drop further in the coming months.
Here’s what you need to understand:
- Fed's role in mortgage rates: While many assume that you need to wait for the Federal Reserve to cut rates for mortgage rates to fall, the reality is different. Mortgage markets react to real-time economic indicators like the Consumer Price Index (CPI). Recent CPI reports have already led to a drop in mortgage rates, so you don’t need to wait for an official Fed cut to benefit from lower rates.
- Talk to a lending professional for the facts: Mortgage rates can change rapidly, and the news doesn’t always capture the most current data. For real-time insights, consult with a mortgage professional who monitors mortgage-backed securities to understand what’s really happening. You can also track how Mortgage backed securities trade on many different websites. One example is mbslive.com
Should You Buy a Home Now?
Given the tight inventory, home values are expected to continue appreciating at a rate of 3-5% annually. Waiting for mortgage rates to drop further could lead to higher home prices, and here’s why:
- Home loan example: If you’re looking at a home priced at $200,000 today with a 7% mortgage rate, waiting for rates to drop to 6% may sound appealing. But if that home appreciates by 4%, its price will rise to $208,000. That’s an additional $8,000 in costs just by waiting, not to mention the rent you’ll pay in the meantime, which doesn’t provide any equity or tax advantages. By the math if you gain 1% but lose 4% you are behind by 3%
Additionally, when mortgage rates finally do drop, we’re likely to see a “feeding frenzy” as more buyers flood the market, leading to even more competition. Not waiting, and purchasing a home when you need one, allows you to secure a home before that rush happens while allowing you peace of mind.
Current Trends: What to Watch for in the Real Estate Industry
- Home affordability programs: Many lenders, including myself, offer specialized loan programs designed to help buyers navigate today’s market challenges. These include first-time homebuyer incentives, down payment assistance, and even programs that allow you to refinance without significant penalties once rates drop. Be sure to explore these options if you’re on the fence about buying.
- Rate buydowns: Another emerging trend is the use of rate buydown programs, where buyers can pay a fee upfront to lower their interest rate. These programs can make a significant difference in your monthly payment and could be worth considering in today’s higher-rate environment.
- Real-time mortgage monitoring tools: Tech-savvy buyers can now use real-time tools to monitor mortgage rates and inventory trends. This gives you a clearer picture of the market and helps you act quickly when the right opportunity arises. Keep in mind, for more complex issues it’s always best to talk to a professional in the industry, like myself.
The Bottom Line: Invest in Housing for the Long Term
If you’re ready to buy and the payment fits within your budget, now is a great time to move forward. You can always refinance when rates drop, and by acting today, you’ll avoid future price hikes and increased competition. Real estate remains one of the best long-term investments, and the potential to build equity now outweighs waiting for small changes in interest rates.
If you have more questions or need personalized advice, call or text me anytime: (810) 223-8412 or email me at Sean.Balcom@Flagstar.com
I’m here to guide you through the complexities of today’s market and help you make an informed decision.
