When Will Things Get Better for Home Buyers?

Unlocking the Door to Your Dream Home: A Guide for Home Buyers

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Credit Sesame on when things will get better for home buyers.

Now is not a good time to buy a home. But when will it be? A combination of rising interest rates and high home prices have sharply increased the cost of buying a home. According to data from the National Association of Realtors, the income it would take to qualify for a median-priced home under today’s conditions is above the U.S. median household income. That means the typical American family is now priced out of the housing market.

This has forced many would-be home buyers to sit on the sidelines to wait for things to get better. However, there are things you can do while you are waiting that will help you afford a home when the time comes.

This article explains what to look for so you know when conditions are improving, and what you should do in the meantime.

Mortgage rates have climbed to highest levels in over a decade

The cost of buying a home has soared in part because of a surge in mortgage rates. According to data from mortgage finance company Freddie Mac, 30-year mortgage rates have climbed by about 2.5% so far in 2022. They are now the highest they’ve been since late 2008.

As a result, the cost of borrowing to buy a home is much higher than it was when this year began, and higher than it’s been in almost 14 years.

The reason for this spike in mortgage rates is inflation. When prices are rising higher than interest rates, lenders lose money. So, lenders have spent the past several months scrambling to raise interest rates fast enough to catch up to inflation. High interest rates may make some home buyers pause for thought.

Home prices are still at all-time highs

According to the S&P CoreLogic Case-Shiller U.S. National Home Price Index, the average price of a home has more than doubled in the past ten years. Most of that increase has occurred in just the past two years.

In theory, higher mortgage rates should eventually cool off the rally in home prices. As more of home buyers’ budgets have to go towards interest payments on their mortgages, there’s less money left over for the price of homes. However, a downturn in prices hasn’t happened yet.

How things could change for the better

If rising interest rates and high home prices are the reasons buying a home has become so hard to afford, what could cure these problems?

Here are some signs to look for that would indicate these trends are turning around:

Easing inflation could allow interest rates to drop

High inflation has pushed interest rates higher, so cooling down inflation is the key to rates eventually falling.

Consumer prices actually took a step back in July. That was a welcome break, but it’s not unusual for inflation to jump around from month to month. One month of declining prices does not mean that high inflation is over.

Still, there are more fundamental reasons to believe that inflation might ease. One is that energy prices have been falling recently.

Energy is an important component of consumer prices. Rising oil and natural gas prices led the surge of inflation earlier this year. However, according to information from the U.S. Energy Information Administration (EIA), oil prices started to fall in July, and continued their decline in August and early September.

Even natural gas, which has suffered from Russian constraints on exports to Europe, has seen prices ease over the past couple of weeks.

Another thing that might take the edge of inflation is a recent expansion of the labor force. This has never fully recovered after millions of people stopped working when the COVID pandemic hit. As job growth has recovered, a shortage of labor has caused wage pressure.

However, the labor force participation rate increased by a strong 0.3% in August. If this trend continues, a growing labor pool could enable economic growth without causing further upward pressure on wages.

Slowing demand could lead to lower home prices

Meanwhile, the high cost of buying a home is taking its toll on purchase volume.

The National Association of Realtors found that the number of pending home sales has fallen in eight of the last nine months. Year over year, the volume of pending sales is down by 19.9%.

In recent months, this drop in home buying demand has slowed the rate of home price increases. If demand continues to fall, it’s only a matter of time before prices actually start decreasing.

What to do in the meantime

The economic trends described above are a couple areas you can watch for signs that the cost of buying a home might be ready to come down. While you’re waiting, there are some things you can do to get ready:

Practice your home owner budget

When people start thinking of buying a home, they usually work out how much they can afford for their monthly mortgage payments and other costs associated with owning a home. Too often, the reality of their spending habits doesn’t live up to goals of that budget.

Give your home owner budget a test first. Before you buy a home, see if you can set aside the amount you’d need to pay for your home each month (after subtracting the amount you’re currently paying for rent). That will help you see if you can live with the budget you’re planning on.

Save up a bigger down payment

While you’re practicing your home owner budget, put the extra money you’re setting aside into a savings account. Keep this reserved for your down payment.

A bigger down payment can help you afford a more expensive house. Or, it can reduce the amount you have to borrow. A larger down payment also makes it easier to get approved for a loan, and may qualify you for a lower interest rate.

Work on your credit score

While you’re waiting for the right time to buy a house, work on improving your credit score. Check your credit report, and try to improve anything that might be dragging your score down. Sign up for credit monitoring so you’re immediately aware of any changes.

A higher credit score increases your chances of qualifying for a mortgage, and may also earn you a lower interest rate.

Watch your target market

If you have an idea of where you want to live, follow trends in the housing market there. Look at price trends, the average time properties are on the market and the number of price listings that are reduced. These are indicators that can help you tell when thing are turning in the favor of buyers.

Consider relocation

Real estate trends are very different from one place to another. For example, the National Association of Realtors’ data show housing is most affordable in the Midwest, and least affordable in the West.

Remote working has made work location much more flexible in recent years. If you have an opportunity to pursue your career while living in a more affordable market, it may be the key to being able to buy a home.

Many homeowners have concluded that this is not a good time to enter the market. Even when conditions get a little better, buying a home is never likely to be easy. However, being prepared can help make it as affordable as possible.

Home buyers may also be interested in:

Disclaimer: This guide to buying a house and getting a mortgage is for informational purposes only and is not intended as a substitute for professional advice.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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