Is now the right time to make the biggest financial decision of your life?
Prospective homebuyers are stuck between a rock and a hard place in answering that question. Yes, home prices have eased a bit in 2023, but elevated mortgage rates and limited inventory remain major obstacles.
At the end of the day, though, buying a home is ultimately a personal decision. Rather than trying to time the market, it’s better to evaluate your long-term goals first while making sure you’re financially ready. You may be in the right position to buy if you have room in your budget, an adequate emergency fund and sustained income security.
“Homeownership is one of the best investments you can make,” says Alix Nadi, team leader of the Alix Nadi Team at Re/Max Around Atlanta Realty. “If you look at what historically builds generational wealth, it almost always involves owning real estate.”
Here are the most important things to consider when buying a house in 2023, including why it might make sense to wait or to rent instead of buy.
Key factors to consider when buying a home in 2023
As a result of lingering supply-chain issues, home prices appreciated at unsustainable levels in 2021, reaching their peak in May 2022. Homeowners, however, were still able to afford those prices on account of historically low mortgage rates. As inflation surged and the Federal Reserve’s rate hikes began to trickle through the economy, though, mortgage rates rose significantly.
Today’s home prices have eased slightly in some areas, but overall remain persistently high, propped up by low inventory levels. Combine that with mortgage rates just below 7% and it’s no wonder the housing market has been so sluggish in recent months. Would-be homebuyers are being priced out of the market, and those looking to sell are reluctant to trade in their bargain mortgage rates for today’s market rates.
Predictions as to what mortgage rates will do in 2023 vary depending on who you ask. Without a crystal ball, it’s difficult to predict what direction mortgage rates will move. However, the general outlook is cautiously optimistic: The average rate for a 30-year fixed-rate mortgage may fall close to 6% by the end of the year, according to the most recent housing forecast from Fannie Mae.
But just as the housing market needs to rebalance, experts say prospective homebuyers will need to adjust their expectations when it comes to mortgage rates. A return to the low rates of the pandemic is unlikely. In fact, it’s those low rates that played a role in creating the inflationary environment the economy is in today. Historically speaking, mortgage rates in the 6% to 8% range are normal. Rates in the 3% range were the exception to the rule.
“Interest rates have been much higher in the past, but it’s been hard for people to react to such a rapid increase in just a short amount of time,” said Daniel Oney, research director at the Texas Real Estate Center at Texas A&M University. “Everybody had a target for how much they needed to save in order to go into the housing market, but when interest rates increased, those goal posts moved too,” he added.
1. Mortgage rates and price trends
In today’s housing market, high prices, along with home loan rates, are two of the most important factors at play. Although mortgage rates fluctuate daily, they’re expected to remain between 6% and 7% for the rest of 2023 -- though what happens with inflation will inform where rates are headed.
If inflation continues to fall closer to the Fed’s 2% target, and the central bank is able to hold interest rates where they are, mortgage rates should stabilize a bit, even trend downward. However, the Fed is unlikely to cut rates in 2023, meaning mortgage rates aren’t poised for any dramatic declines either.
It’s important to understand how the rate you lock in for your mortgage will affect your monthly payments, as well as the total amount you’ll pay over the lifetime of your loan.
For example, if you take out a 30-year fixed-rate mortgage to buy a $500,000 house at a 5.2% interest rate, you’ll pay $488,000 in interest over the life of your loan. But if you wait and buy a $450,000 house at a 6.5% interest rate, you’ll end up paying $574,000 in interest over the course of your mortgage. So even though you paid less for your home, you’re paying more than the difference in price due to interest accumulating over three decades.
Ideally, housing prices and mortgage rates will move towards an equilibrium and the affordability crisis will ease. It will continue to depend, however, on incoming economic data.
Experts predict prices to move farther away from their May 2022 peak, helping to curb housing expenses. However, even if improved affordability helps reestablish demand in the housing market, experts say there’s still a fundamental supply shortage. As of mid-June, there are 40% fewer homes for sale than prior to the pandemic, according to real estate brokerage Redfin.
“Inventory will continue to be an issue until we see rates hover around the 5.5% mark. That’s when we’ll see sellers back in the market and inventory increase,” said Glenn Brunker, president of Ally Home.
2. Financial and personal goals
Making the right homebuying decision ultimately boils down to your individual needs. Don’t fret too much about what prices and mortgage rates will do in the future. Focus instead on why you want to buy a house and whether or not you’re in the right position to do so.
Homeownership is still considered one of the most reliable ways to build wealth. When you make monthly mortgage payments, you’re building equity in your home that you can tap into later on. When you rent, you aren’t investing in your financial future the same way you are when you’re paying off a mortgage.
Another factor to take into consideration is how long you plan to live in the house. If you expect to live there for a decade or longer, you’ll likely be able to refinance your mortgage to a lower rate, reducing your monthly payment in the process. However, if you plan to move in a few years, it likely won’t make financial sense for you to refinance. In that case, it’s worth considering an adjustable-rate mortgage, which can help offset today’s high mortgage rates by offering you a lower initial interest rate that only adjusts or increases later on in your mortgage term.
Scaling back on your budget and looking at homes that may be smaller or in less expensive neighborhoods is an option to consider if higher mortgage rates have made your previous goals unattainable.
3. Future housing trends and recession risks
Buyer competition decreases when buying a home becomes increasingly unaffordable. Typically, inventory levels increase in response. But with millions of homeowners hesitant to give up their bargain mortgage rates, inventory is slim.
There’s also talk of a recession. Depending on who you ask, the US economy is staring down the barrel of a recession, if it’s not already in one. Homebuyers may expect home prices to drop in a recession, but that isn’t always the case. The degree and speed of a drop in prices is influenced by numerous factors -- including the debt levels of potential homebuyers, current prices versus the historical median, demographics and the age of the homebuying population.
In a typical recession, the Federal Reserve will lower its benchmark short-term interest rate to help stimulate the economy, in turn making homeownership an attractive opportunity. But today, the Fed’s primary focus is cooling inflation by hiking and maintaining that rate. It’s already done so 10 times since March 2022 and is expected to keep rates high at least through the end of 2023.
Whatever the case may be, experts recommend a conservative approach when it comes to the housing market. Being cautious with how you spend your money right now is essential.
“If you deplete your entire savings account balance for the sake of becoming a homeowner, it could leave you reliant on high interest credit card debt should you run into an unexpected expense or emergency -- be it an illness, a job loss or an essential repair,” said Shelby McDaniels, national director of business development for home lending at Chase Home Lending.
In any economy, having an emergency fund is smart, but it’s especially important in a recession. The odds of losing a job or struggling to find a new one are higher, and you want to make sure, before making any big decisions -- like buying a house -- that you have the time and money to do so.
Is it better to rent than buy right now?
On one hand, if you buy a house and secure a fixed-rate mortgage, that means that no matter how much prices or interest rates go up, your fixed payment will stay the same every month. That’s an advantage over renting, as there’s a good change your landlord will raise your rent to counter inflationary pressures.
However, the national median rent price posted its first drop in yearly prices since March 2020, according to a report from Rent, an online property rental site. Rent growth has been decelerating for the past few months, but May 2023 marks the first time prices have gone negative due to increased rental inventory but weakened demand.
On the other hand, even though a fixed-rate mortgage can offer you more predictability and budget stability, there are still benefits to renting right now as the economy worsens.
For example, one advantage of renting over buying is that you can save the cash you would have otherwise needed to use for a down payment. In a time of economic uncertainty, if you don’t have to worry about coming up with a down payment and emptying most of your entire bank account to secure yourself a home, you can stay more liquid. Having more cash on hand can offer you added security if a recession negatively impacts your financial situation.
“It’s important to know the differences between the cost of owning a home versus the cost of renting,” said Robert Heck, vice president of mortgages at Morty, an online mortgage marketplace. “How much is homeowners insurance going to cost? How much are the annual property taxes? Maybe you’re not used to paying property taxes if you’ve been renting. Consider the costs that will go into buying a home,” Heck added.
Ultimately, whether you rent or buy often comes down to practical considerations such as whether you need more space to start a family, or your lease is ending -- regardless of market conditions.