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Buying a Home in a High-Interest Rate Environment: A Prudent Decision?


The decision to purchase a home is invariably complex. While it’s proven out overtime one of the most approachable, consistent and reliable ways to build wealth is through home ownership, it’s not always the obvious choice in the “here and now”.

 As we see playing out in the news daily, interest rates play a pivotal role in influencing the market as a whole, but more importantly for you, your own decision as a buyer.  As is presently the case, when the environment skews towards high interest rates, potential homeowners often find themselves at crossroads, mulling over the viability of the commitment of a mortgage and home ownership.

To make an informed decision, it's crucial to weigh the advantages and drawbacks. It’s my hope the following will provide you some insight as you make your own personal decision.

 

Advantages of Buying in a High-Interest Rate Environment

One of the primary advantages of participating in a housing market during periods of elevated interest rates is the potential for less competition. Many potential buyers have been dissuaded by the cost of borrowing. Those who choose to proceed now will find themselves facing less competition.

What was recently a market where there were sometimes a dozen offers well over list price in the first weekend of a home’s listing, is now more commonly an offer or two in the first few weeks. Despite low inventory, Buyers are having more success securing a home earlier in their shopping efforts.

Additionally, the diminished demand often finds buyers in an improved position during negotiations, with sellers being more amenable to price adjustments, inspections and certainly more favorable terms than were available just months ago.

Furthermore, as the financial world is dynamic, interest rates do not remain static. A decision to buy during a high-interest period might pave the way for future opportunities. Should rates continue to go up, locking in a rate now looks pretty good. Better yet, if rates decrease, homeowners could refinance their mortgages to potentially reduce their monthly commitments.

 

Challenges and Pitfalls

The primary challenge presented by high interest rates is the obvious one: an increase in monthly mortgage payments. For many, this immediate implication can limit the range of properties within a buyer’s budget.

Another potential detriment to consider is the influence of high-interest rates on broader market dynamics. Historically, there have been instances where elevated interest rates have dampened demand, leading to stagnation or even a decrease in property values. Such scenarios can be especially precarious for new homeowners who might find their property's value diminishing shortly after purchase.

 

Factors to Ponder

Given this backdrop, several considerations become paramount for potential buyers. Firstly, individual financial health is what I’d consider to be the most important factor in a decision.

Additionally, the intended duration of stay in a purchased property is extremely pivotal. For those envisioning a long-term residence, fluctuations in interest rates and home values might be less consequential. Conversely, for individuals looking at shorter durations of homeownership or whose future sale may be subject to their work or other externality, the prevailing market conditions might hold more sway in their decision-making process.

I also hear frequently “I’ll buy when rates come back down” or when “the values of homes crash”. While I’ve said the same thing myself, the only thing proven consistently is the market (housing, stock or tulip) cannot be reliably or consistently timed and that the trend over a long enough timeline, has always been up. If Ray Dalio and Cathie Wood can’t time the top or bottom, I know I can’t either. I suggest a buyer rely on their own circumstance at the time.

Lastly, Prospective homeowners need also to be deliberate in their borrowing and buying approach. Be certain to have competent and empathetic guidance along the way. Be sure your shepherds have your priorities at heart. 


By: Tyler Ross

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