Timing markets is notoriously difficult, and the real estate market is no different. There are always risks and opportunities to weigh, and waiting for the perfect time to buy or sell may not work out as planned. Just two years ago, for example, buyers in the Washington, DC area who had been waiting for the housing market to cool and thought the COVID-19 pandemic might slow things down, found themselves competing in the tightest bidding wars in decades as families sought more space for home schooling and remote work.
Understand Mortgage Rates & Inflation
It’s true that 30-year fixed mortgage rates gained approximately three percentage points since the 2021 low of 2.67% during the recession triggered by the COVID-19 outbreak. However, rates have already fallen from that high and many rates are now once again under 5%. Although it varies by bank, loan program and the individual applying, if you have good credit and can put down a 20% downpayment, 30 year fixed-rate mortgages may be secured in the 4 percentage range, and adjustable rates can be found under 4%*.
Rates are still at historical lows — for most of the 1970s, 80s and 90s, the 30-year fixed rate was well above 7% and it is only following the subprime crisis of 2007 that rates dropped below 5%. Moreover, most banks offer easy and affordable refinancings that make it financially sensible to take the lowest rate on offer now and then refinance when rates come back down. In addition, builders often have long-term relationships with lenders and may offer special programs or discounts to help offset the costs of buying new construction.
Inflation is another important indicator to take into account. The U.S. Consumer Price Index (CPI) climbed 9.1% in June, the most in more than 40 years. While rising prices are generally not good for consumers or the economy, they are actually a boon for homeowners: Unlike rent, a fixed-rate mortgage payment stays the same for the lifetime of a loan, so after a few years of rising inflation your once-high mortgage payment may start to look quite reasonable. And as you pay off your mortgage, inflation drives up real estate prices across the board, ensuring that at the very least your investment will serve as an inflation hedge.
But economic calculations about interest rates and inflation don’t mean much without context about the specifics of the residential market you’re in. Particularly in large cities with vibrant job markets and a tight housing supply, real estate prices are not as closely tied to the fluctuations of interest rates and nationwide trends, and depend more on the state of the local economy and housing supply. In Washington, DC, employment numbers are close to their pre-pandemic levels, and because the area has a concentration of fairly recession-resistant government jobs, many DC area neighborhoods continue to be highly desirable, while housing inventory remains painfully sparse.
Compare Mortgage Payments to Rent
While the cost of a monthly mortgage payment may seem high, it needs to be considered against the cost of rent. Rent prices are climbing across the DMV and rents have gone up on average 9% over the last year. Sources list the average cost of renting a 3-bedroom ranging from $3,750 to $4,294 per month. Taking this into consideration, the cost of a mortgage payment for a 3-bedroom home may seem more reasonable, especially when you consider the tax benefits you receive and the equity you are building.
Townhomes in particular can be a smart investment if you’re trying to be cautious. Not only are townhomes often located with an easy commute to job centers, but they also cost less to maintain than single-family homes and their HOA fees tend to be lower than for comparable condominium developments. Newly built townhomes especially have very low maintenance and repair costs compared to older homes. In Washington, DC, townhomes are relatively liquid — easy to buy and sell — due to the constant influx of high earners who work for the federal government, international organizations such as the World Bank or think tanks and academic institutions.
Embrace a More Normalized Market
The past few years have been an unexpected frenzy of activity. While low interest rates certainly have helped many afford a new home, it has also been a stressful time for many home shoppers dealing with tough competition, needing to offer above asking price, getting outbid, foregoing inspections and more. And while many are talking about increased rates and prices (and rightly so!), it is also important to consider the benefits of this less frenzied market, including:
- Having time to do your research
- Not needing to forego inspections
- No bidding wars and getting outbid
- Negotiating on prices instead of offering ABOVE asking price
In the end, the most important consideration is personal, and no economic expert can make the decision on when is the right to buy for you: Do you plan to stay in the property that you’re buying for the long term, and can you find any better deal on your budget that still meets your needs? We all want to live in the best space that we can comfortably afford, and often, even if mortgage rates and real estate prices are high, home ownership can often still be the best deal, especially when looking at a long-term horizon. Homes in great locations will always be in demand and when the time is right for you, it is the right time to buy.
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*As of 8/9/22. Subject to change. Consult a lender for specific information.