Buying a Home While Interest Rates Are Still High? The Case for “Yes”

For too many years, the U.S. housing market has been out of reach for too many people. But giving up might not be an option.

Those able to get a foothold in this market often do it to attain a viable financial future. A homeowner’s wealth goes up along with home values. So, owners accumulate home equity month by month. And property inflation helps them do it.

In this context, a recent NBC News segment featured financial advisers who urge people to become homeowners — in spite of the current high interest rates. From their perspective, not owning is unaffordable.

After all, the gap between the haves and have-nots of real estate widens with inflation. Fear of missing out, a.k.a. FOMO, is a totally reasonable response to this reality.

Or you can…

Hang on, Baby: Lower Interest Rates Are Coming (They Are, Right?)

We know interest rate cuts aren’t coming right away. The Fed’s inflation data is still too unsettled. Some commentators think rate cuts are completely out of the cards. CBS News, on January 11, 2024, blasted the alarm: Mortgage interest rates could soon be on the rise again.

That’s the day some unwelcome data came out. Turns out inflation rose in December 2023.

This is why we know the Fed is going to keep rates up at least a little while longer. Rate hikes are done to put a lid on inflation.

If the January 2024 inflation report really indicates that inflation will be stickier than we thought this year, then interest rates could rise yet again. The government hasn’t ruled out potential hike rates in their next meeting on January 30.

Well, if that happens, for some homebuyers, CBS says, “now may be their best chance to act” before rates go up again.

But lower interest rates by the second half of 2024 have been widely expected. And assuming rates do come down, the market will attract more buyers. Already, as of mid-January 2024, the typical mortgage comes with interest in the 7% range. Just a few months ago, it was nudging 8%. As interest rates go down, the market becomes more inclusive — and competitive! Lower rates are a two-edged sword.

Meanwhile, loan-backers Fannie Mae and Freddie Mac want to take a “more inclusive approach” to mortgage approvals. They have acknowledged that every loan applicant with a low FICO® score isn’t necessarily a default risk. So they will adopt new credit scoring models.

On the horizon! New credit score models for conventional loans are coming next year.

Let the Equity-Building Begin.

If you’d like to buy a home, and the market you’d like to buy into won’t work with your finances, you are not alone. You might need more time to get situated. But that shouldn’t mean giving up entirely on getting a deed in your name.

Once you do achieve that goal, then your equity-building years can begin.

Every time you submit a monthly mortgage payment, you’ll be reducing your total debt, building your credit profile, and increasing your equity in the house. (Your home equity is the share of value you own, minus the mortgage debt.) As you continue to own your home for the long term, you can expect to see real estate values establish new highs.

All this adds up to the major reason why real estate tends to be a good investment over time. Ask just about anyone to name a safe, low-risk investment, and real estate will be among the top three answers, if not the first. And we now know that the value of home equity holds firm even through a pandemic.

There’s a message in real estate’s resilience. Today’s hopeful buyers, take heart.

It’s a Long Game.

For a homeowner, waiting for a home’s value to rise is like watching paint dry. (From a buyer’s standpoint, that’s helpful.) And yes, with buying so costly now, it can take years to reach a break-even point. Moving is expensive, too. But equity-building is a long-term play. Inflation is what pushes the home’s market value up, and that’s basically a waiting game.

Waiting is worth it, if historical data is any kind of guide. The overall rise in U.S. property values is fairly consistent, if you stand back and look at the chart.

Try it now. Look at this chart from St. Louis Fed. Or just think about whatever home you are in right now, how much it would have cost your parents to buy, and how much it’s valued at now.

Does all this make buying a home risk-free? No. Neighborhoods can lose value. Climate change can also take value out of a home, or out of a whole area.

Does it make buying a home free of struggles? Definitely not. Homeowners have to stay on top of property taxes, insurance, homeowner association (HOA) dues, and property upkeep. Property taxes rise along with property values. Then again, mortgage interest is deductible with the IRS.

Owning has all kinds of cost-benefit tradeoffs. Rates are only one element in the broader picture. Interest rates vary from month to month, week to week. It’s very hard to time where they’ll be in three, six, or 12 months from now.

Mortgages can be refinanced, and a first home need not be a dream home. Getting on the ladder is a dream worth celebrating.

Compare It to the Alternatives.

Compared to other assets, real estate is a relatively predictable holder of value. And some buyers use it to draw income by starting a small rental business. A variation on this theme is house hacking: buying a home to live in, together with renters. These goals can be achievable even with a loan backed by the Federal Housing Administration (FHA).

Getting a mortgage and maintaining a home is not for everyone — but for those who do buy, it is indeed a form of wealth-building.

And it’s never too late to get into it. Buying the right home, in any economic climate, can increase a consumer’s financial strength.

What’s Our Takeaway Here?

Homes provide shelter and comfort. And they do more than that. Homes also serve as assets. In this economy, that counts as much as it ever has. And still, each new buyer sets out on a unique journey. Some will struggle. Some will prosper.

The key point? It’s a little easier to prosper after buying an asset that appreciates in value over time.

Supporting References

Johann M. Cherian and Ankika Biswas for Reuters, the Thomson Reuters news agency, via Reuters.com: Wall Street’s Indexes Choppy as Inflation Data Dampens Rate-Cut Hopes (Jan. 11, 2024).

Matt Richardson for the “Managing Your Money” section of CBSNews.com: MoneyWatch – What the Inflation Rise Means for Mortgage Rates (Jan. 11, 2024, using reports from The Associated Press).

Marley Jay and Jasmine Cui for NBC News via NBCNews.com: Why Buying a House Is Still Financially Beneficial Even With Sky-High Prices and Interest Rates (Nov. 11, 2023).

Deeds.com: Four Reasons Real Estate Tops Other Investments (Aug. 3, 2022).

And as linked.