My partner and I own and live in a one-bedroom condo and would like to start a family in the next year, so we need more space. Should we sell our condo and rent a two-bedroom apartment for a year or two? Or just pull the trigger and buy a house, even though they're overpriced and interest rates are high?
It seems that anyone interested in buying a home right now is stuck between a rock and a hard place: high home prices and rising mortgage rates. So you’re not alone in wondering if you should wait it out, or jump in now before mortgage rates go even higher. Unfortunately, I don’t have a crystal ball with a definitive answer to this question.
But even without the ability to read the future, I do know that you shouldn’t count on the housing market to “crash” like it did more than a decade ago. For one thing, households are in a better financial situation than they were back then, so it’s unlikely too many homeowners will be unable to afford their mortgage payments. Another reality is that while mortgage rates are rising sharply, roughly 90% of homeowners have fixed interest rates. Even with interest rates rising, their loan payments won’t change, making it less likely they will need to sell or see their mortgage go into foreclosure.
All of that doesn’t mean home prices won’t go down, either. Although home prices in April were up 20.4% since last year, prices have slowed their climb slightly compared to the month prior, when home prices were 20.6% above what they were in 2021. And what’s more, some experts say that home prices could decline 5% to 10% over the next year in some regional housing markets.
This might make you think that waiting could be your best bet. But don’t forget that the Federal Reserve is trying to bring down inflation by raising interest rates. The higher interest rates go, the more expensive loans become. And it’s likely the Fed will raise rates again. So if you think mortgage rates are too high now, you might get an unhappy surprise in the form of even higher rates in the next few months.
Ultimately, you have to ask yourself if the amount that home prices might drop would offset the higher amount you’ll have to pay in interest. For that, it’s best to check in with a realtor and a mortgage lender in your area. Ask them what trends they are seeing in the neighborhoods that interest you. Prices in some cities and towns are rising slower than in others.
There is also the unknown factor of a potential recession. During a recession, home prices fall, and so do interest rates. But there is no guarantee that we will even go through a recession or how long and painful it might be if we do.
So do you stay or do you go?
Staying flexible might be best right now, and a year-long lease locks you in for the contract term, making it harder (but not impossible) for you to leave if you find a place you like. And with rent costs up all around the country, you might end up spending more than you’d like.
I’d recommend you get preapproved for a mortgage. That way you’ll know how much a bank is willing to lend you, and at what interest rate—you might be pleasantly surprised by the loan offer. A preapproval typically lasts for up to three months, so you’ll be able to pull the trigger quickly if you happen to find a home you like. And if you do decide to sell and wait, consider renting month to month, or with a more flexible lease so you can leave if the housing market becomes more favorable to your situation.
If you have questions about money, Kristin is here to help. Submit an anonymous question and she may answer it in a future column.
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