Rate Increases & Home Prices
Why are rates high?
Interest rates were raised to the highest levels in this millennium in the last few years. These rate increases came after the lowest rates in history, making the difference in mortgage payments felt even more. The Fed increased rates in an attempt to slow and curb inflation. The federal funds rate doesn’t just impact home loans, but all financing in the United States and the rest of the world.
Why don’t home prices come down?
Supply and demand is the economic explanation for all free market pricing. In theory demand is lowered by higher rates, because less people can qualify for the monthly payments. However, the supply of homes for sale has been a bigger issue in California. Most homeowners were able to lock in record low interest rates during the Covid Pandemic making them less likely to sell and move. Even those that buy a new home often keep the departing residence as a rental. The rental market is strong and can cover the cost of the homeowner’s monthly obligations on their old home. Construction materials skyrocketed in recent years delaying new developments along with the difficulties of building with California’s regulations. Homes are valuable because they have tangible value and use. As our dollar gets less and less valuable because of inflation the inherent value in a home holds strong.
When should you buy?
The question of “when to buy” should be changed to “can you buy”. Homes are a long term investment and timing the market is rarely perfect. The most important thing is can you handle the monthly cost of homeownership. Exploring what you can be approved for and what fits your monthly budget are questions that can be answered by a lender.
Lower rates in the future
The Fed has planned rate cuts starting in 2024. Lower rates will flood new buyers into the market and push up demand and therefore home prices. If you are able to buy when rates are high, you will likely be buying at a lower purchase price than when rates are low. As a homeowner, you can always refinance and lower your monthly payments once interest rates come down.
