Brainstorming: Purchasing a Home with High Interest Rates

          As the real estate market continues to fluctuate, many potential homebuyers are questioning whether or not they should purchase a home. Many economists are predicting a recession and that word alone creates uneasiness in our stomachs.  While it may seem like a daunting decision, it's important to weigh the pros and cons of purchasing a home while interest rates are as high as they are. In this blog, we'll discuss the benefits and drawbacks of buying a home in this current climate.

         First off, a disclaimer: nobody can predict the future accept God.  I can’t tell you if the market is going to head for the moon or plunge in to a recession. There are way too many factors to consider. That said we often times read predictions like the prediction from George Hammond below while we are researching before making a big decision like purchasing a home.  This article is meant to present potential strategies that may help you after you assess your own finanacial situation and whether or not purchasing a home is the right decision for you. One prediction for Tucson’s economic forecast being made is by George Hammond, director of the research center, who said:

"the most likely forecast shows a mild downturn starting late this year and ending in mid-2023. “That is expected to take the wind out of Tucson's sails, generating a significant slowdown in growth next year across all major economic indicators.” 

What could this mean for you when considering purchasing a home in 2023? 

When the economy is in a downturn, the Federal Reserve often lowers interest rates to stimulate economic growth. This means that borrowing money becomes cheaper, and mortgage rates drop as a result.  This translates to lower monthly payments and the ability to qualify for larger homes in more desirable areas.  Everyone loves more for less and at first glance it may seem like an obvious choice to wait until these perfect conditions arise.  Sadly, it’s not that simple.  For one, there is no telling when the interest rates will be lowered.  You might be waiting for an extended period of time.  The longer you wait the more money you will be throwing away on rent instead of building equity in your own home. 

Another thing to consider is with lower interest rates, there is often more competition for homes, as people are eager to take advantage of the lower costs.  Since we are still seeing multiple offers on well-priced homes even while interest rates are hovering around 7%, its possible and likely, that when interest rates drop, that the market will explode with even more cut throat competition for the limited available inventory.  Just like in 2020-2021 buying will require sacrifices that are oftentimes at your own peril as a buyer.  Flashbacks of waiving inspections and appraisal contingencies still give me nightmares.  Not to mention, list price goes out the window when competing with 10 other offers.  

Why this happens is the economic principle of supply and demand.  The more people demanding houses because of lower interest rates, the lower the supply of houses that will be available to compete for. This is what we call a sellers’ market; when sellers have the upper hand in all aspects of the transaction. This makes it difficult for buyers to negotiate on all fronts and tends to leave a bad taste in the purchaser’s mouth when the transaction is complete and buyer’s remorse sets in.

Though this all sounds terrible if you are hoping to purchase a home, and it definitely can be, there are some strategies to negate some of the chaos.  One potential strategy is to purchase when the rates are higher if you can.  The reason behind that logic is simple: higher interest rates mean less competition.  Also, mortgages can always be refinanced with lower rates in the future.  What that means for you is that by purchasing when the rates are a bit higher you get all of the advantages of buying in a buyers’ market when you have the upper hand. In a buyers’ market you have the ability to negotiate e price, repairs, improvements, home warranties, and closing date.  These are all definitely in your advantage as a buyer.  Nobody likes paying over list price for a new home that you still need to put a new roof on because you were competing against 5 other buyers.  You will have to pay a higher interest rate up front but only until the rates drop and then you can simply refinance for the lower rate.  For people who are able to qualify for homes that meet their criteria, this is typically a good strategy.

There are also disadvantages to consider when purchasing with a higher interest rate.  The most obvious being that you will have a higher monthly payment.  I’m sure you agree that when it comes to bills, the lower they are the better.  You need to consider what you are comfortable paying per month and discuss that with your lender and realtor to make sure that you are not over shooting your budget because there is no telling when the interest rates will be lowered.  With higher interest rates you will also not qualify for as much.  Typically, when the interest rates are lower you can qualify for a higher loan amount which translates to more options. Once again you will want to consider your current needs and your financial situation to determine the best course of action.  

Ultimately, the decision to purchase a home will depend on your individual circumstances. If you have a stable job and are in a good position to invest in a home, you are sick of paying for your landlord’s investment in rent, you want to build equity of your own, and want all the advantages of negotiations when you purchase, then buying may be a smart move. However, if you do not have stable income, and you cannot qualify for what you want now because of the higher interest rates then it may be a good idea to save up, and work on your credit.  

In any case, it's important to work with a reputable real estate agent who can help you navigate the complexities of the real estate market and make informed decisions about your investment. A skilled agent can provide valuable insights into the local market conditions, negotiate on your behalf, and ensure that you find a home that meets your needs and budget.