Buying a Home in a Down Market

Learn how to navigate low home prices and interest rates.

Couple in garden looking at house
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It's never easy to time the market for the optimal price and interest rate when buying a home. If the real estate in your area is in the middle of a down market, it is normal to wonder if you should wait to buy a home. Should you wait for prices to go lower? What if you’re already a homeowner and you want to move into a bigger home? Learn how to gauge the market and make smart buying and selling decisions.

What Is a Down Market?

A down market is when real estate sales are sluggish and prices fall. They're often called a "buyer's market," too. It could mean that interest rates are low, which could give you even more incentive to buy your dream home. However, it could also mean that if you already own a home, you're less inclined to put it on the market out of concern that you'll lose money on the sale.

Strategies and Reasons for Buying in a Down Market

You might want to buy in a down market if:

  • You want to move up to a more expensive home: A down market could be the best time to do just that. But the timing is tricky. The longer you wait to sell your home, the lower the price of it could fall. If this happens, you'd get less for selling your home, putting the more expensive home out of reach.
  • You can arrange for alternate housing: This is another strategy where you sell now, move somewhere temporary while you wait a few months to see where prices go, and then buy your new home. The drawback is that you’ll have to move twice in a short period of time.
  • You sell and buy simultaneously: This could help you still be ahead of the game if the more expensive home is being sold at a greater bargain than the loss on the sale of yours. However, you could be forced into a stressful temporary living situation if you don't sell and buy in the same window of time.
  • You believe the home will be a long-term investment: First-time homebuyers can take advantage of a down market to buy a house that will, in theory, increase in value over time and result in a good investment.

If you're able to buy in a down market, don't forget to compare rates. Getting multiple quotes from lenders can ensure you're getting not just a low rate, but the lowest rate you're able to find.

Benefits of Buying in a Down Market After Selling

Say your present house is worth $300,000, but because of high inventory in the area and few buyers, you must reduce your price by 10%. So, instead of receiving $300,000, you would get $270,000 and the down market would "cost" you $30,000.

If you are planning to move up to a $500,000 house located in the same distressed market, you could probably buy that house at that same 10% discount, or $450,000. That would mean you could save $50,000 on buying that home.

So, if you sell your home in a down market and buy a new home in the same down market, theoretically you could come out on top:

  • You sold your home for $30,000 below asking.
  • You bought your new home for $50,000 below asking.
  • You’re $20,000 ahead, not counting the costs of sale.

Down Markets Can Give You More House for Your Dollar

It can be hard to visualize exactly how a down market affects how much house you can afford based on your mortgage payment. Read through the following chart to see how a decline in interest rates can make it possible to afford a more expensive home and drop your principal-and-interest payments.

The home prices in the chart assume a 20% down payment:

Home Price Interest Rate Payment (Principal and Interest Only)
$425,000 5.5% $1,930.00
$450,000 5.0% $1,932.00
$475,000 4.5% $1,925.00
$500,000 4.0% $1,909.00
$525,000 3.5% $1,885.00

The payments are all in a close range. However, if you can afford the $425,000 home at an interest rate of 5.5% in a healthy market, you can also afford the monthly payment on the $525,000 home with a 3.5% interest rate.

If you choose a more expensive home in a down market, keep in mind that your property taxes will likely be higher since your home’s assessed value is higher. 

Why Waiting in a Down Market Could Cost You

If interest rates are near an all-time low, with the potential to start inching upward, waiting to buy a home could cost you. You might not be able to afford to buy a home at any price if interest rates increase.

Here's how much extra interest you’d pay with each incremental increase in rate if you're looking for a 30-year home loan of $400,000:

  • A 0.5% increase would cost you over $40,000 extra.
  • A 1% increase means paying over $83,000 extra.
  • A 2% increase would mean paying over $170,000 extra.

The national mortgage rate jump in the spring of 2018 is a good example of how waiting four months could cost you tens of thousands of dollars.

The average rate on a 30-year fixed-rate mortgage was 4.03% in Jan. 2018. By May, the average rate jumped to 4.59%.

On the flip side, buying a home while mortgage rates are low could mean saving thousands of dollars in interest over the life of your home loan.

As an example, the average mortgage rates on a 30-year fixed-rate loan dropped 0.84% between January and August 2019.

The Bottom Line

A good strategy is to weigh all the pros and cons of homeownership before making the decision to buy in a down market. Don't panic over headlines and take the time to make an informed decision. Run your own numbers to understand what you can afford. And consider working with an experienced real estate agent who will put your interests first.

Article Sources

  1. Royal Bank. "Seller's Market vs. Buyer's Market." Accessed April 24, 2020.

  2. Redfin. "What Is Buyer's Market vs. Seller's Market?" Accessed April 24, 2020.

  3. Redfin. "How to Buy and Sell at the Same Time." Accessed April 24, 2020.

  4. Freddie Mac. "Monthly Average Commitment Rate And Points On 30-Year Fixed-Rate Mortgages Since 1971." Accessed April 24, 2020.