“If the mortgage rates go up, won’t prices go down?”
This is the comment that I’m hearing more and more. In theory, it makes complete sense. But in practice, it’s more complicated than that. I’ve been looking for a simple way to communicate what feels like a difficult concept to grasp- that is, what is the practical ramification of rising rates, even if prices come down meaningfully. That is:
How far do prices have to fall to make it worth the wait?
So here’s an example to use. Someone wants to buy a property around $2mm. Rates are rising, and that buyer thinks that if she waits, prices will subside to the degree where it’s an overall better deal. Let’s use 3.5% as an example mortgage rate. If they put down 25%, their monthly mortgage cost will be $6736. If they put down 50%, their monthly mortgage cost will be $4490.
The expectation is this, that somehow, when rates move to 5%, or 5.5%, that prices will drop so much that it’s worth waiting. Is it true?
Prices have moved up about 10% since the COVID bottom. So let’s say that drop even further down. So a $2mm property moves to $1.75mm. This is about a 14% drop. When that happens, and rates are at 5.5%, the results are as follows: With 25% down, the monthly mortgage cost would be $7452. If they put down 50%, the monthly mortgage cost will be $4968.
So, even with a price drop that puts it below the most recently moment in the market that would have been the BEST CHANCE in a DECADE to make a buy, it’s STILL more expensive to wait. Don’t take my word for it- put in your own numbers here.
It seems pretty optimistic for prices to drop so significantly (20% or more) to make waiting sensible. You can play around to see just how often prices drop 20% here. The answer? I haven’t seen it except once in the last 20 years. Are you willing to take that chance?
Waiting may only make sense if you are not financing at all. Otherwise, you may be waiting for a price reduction, even if it’s HUGE, may not be enough to justify the wait for a price drop commensurate with rising rates.
I have to ask you, then. If you are thinking about buying, WHAT ARE YOU WAITING FOR?