Should Buyers Wait for Prices to Come Down?

Buyers are frankly having a hard time finding the right home and facing stiff competition when they do. We coach our buyers on how to structure competitive offers that win (i.e., the highest price is not always the best offer). Still, some buyers are headed for the sidelines, deciding to wait until prices come back down. Is this a smart strategy?

Last weekend an article in Business Insider declared “Wait until 2022 to buy a house, economists say.” The story goes on to explain that builders are the big problem and there will be more new construction to buy next year. True, many American housing markets are driven by new construction, but this is really oversimplified, especially in areas like New Orleans where we just don’t have the land to build new homes.

Savvy buyers today realize that the affordability (how much home they can afford based on interest rates and household income) has never been better. Now is the time to lock in super-low interest rates that they will enjoy for years, regardless of housing prices.

Economists do predict home-price changes. No one knows for sure if this will be a slowdown in increases, a leveling off of prices, or an actual decline. Economists also predict that interest rates will eventually go back up. They really can’t get much lower, and no one expects negative rates here in the US. Yes, prices could come down. Waiting for this to happen poses two big risks to buyers:

• A key driver of home prices is interest rates. When interest rates rise, prices must also decline unless buyers’ incomes also rise. There is about a 1:10 ratio of purchasing power to home price: a 1 % increase in interest rates means a buyer loses 10% in purchasing power. To add insult to injury – this affects buyers immediately, and sellers are the last to catch on: “Mike, just go find me a wealthier buyer, I’m not dropping my price.” Prices do come down, but it takes longer. Buyers who decide to wait for prices to come down will likely experience higher mortgage rates…and thus lower purchasing power…and sellers slower to respond. Buyer’s actual monthly cost goes up or stays the same.
• More importantly, all of this will take time. And in that time, buyers will not be in the home of their dreams, or even just the home they need now for their growing family.

Want to understand more? Here is a great article from FirstTuesday that explains in-depth the historic relationship between rates and home prices. It’s nerdy, and here is the synopsis:

• Home prices are a see-saw between banks (interest rates) and sellers.
• Buyer’s incomes are the fulcrum of this see-saw.
• Remember the 1:10 Rule of thumb: a 1% change in mortgage rates = about a 10% drop in purchasing power. Rates go up 1%, you can now afford 10% less home.