Would-be homebuyers who have decided to wait for mortgage rates to fall so they can afford to leap back into the market should realize that waiting isn’t going to help — they would just be swapping their too-expensive financing problem for a bidding-war pricing problem as the number of houses for sale shrinks. The best hope for homebuyers now might be to just go ahead and accept the higher mortgage rates and hope to refinance later.
The inventory of houses for sale is the biggest reason to think that buying now might be the best option. The surge in homes for sale that we saw in the first half of 2022 has not just ended, but reversed. New weekly listings have declined significantly since July and are down 17.5% year-over-year according to Redfin. The pace of new listings is now sharply below levels seen in the pandemic years of 2020 and 2021.
Even with more buyers staying on the sidelines, the lower listing volume is pulling down the overall level of inventory at a faster rate than we expected even a few weeks ago. According to Altos Research, it’s possible that we’ll start 2023 with fewer homes for sale than we did at the start of 2021. Homeowners by and large have strong financial positions and low mortgage rates, and simply don’t have to sell.
So falling mortgage rates likely wouldn’t bring relief to buyers when more bidders are competing for a limited number of homes, pushing prices higher. It’s understandable that a buyer would think that a home priced at $400,000 would be within their budget if mortgage rates were 4.75% instead of 5.90%, but it’s possible that if mortgage rates dropped, the home would be listed at $440,000 with more competition to buy it.
Redfin’s data shows that in the first week of September, taking into account mortgage rates and home prices, buyers are committing to the same level of monthly payment — on average just over $2,300 — that they did in early May. If mortgage rates continue to rise that might mean selling prices need to fall to keep those monthly payments even. But over time, as worker incomes grow, I would expect that monthly payment level to gradually rise. The prospect of homebuyers “saving money by waiting” seems low — it’s just a question of whether they will be paying more for mortgage interest or principal.
Given these dynamics, there doesn’t appear to be any advantage to waiting. There’s no glut of inventory on the horizon. There’s less competition to buy at the moment largely because affordability has worsened. And if mortgage rates eventually do decline, new homeowners can refinance into a mortgage at a lower interest rate — effectively getting the benefit of both the lower rate and having bought their home at a lower selling price.
As rents and incomes continue to rise, it’s a matter of weighing the certain cost of high mortgage rates against the probability of getting caught in bidding wars at higher prices down the road after mortgage rates fall. Both scenarios are risky, and in May I saw the question differently. But now waiting for lower mortgage rates promises to bring on a different kind of buyer frustration down the road.
More From Other Writers at Bloomberg Opinion:
It’s a Housing Slump, Not a Financial Crisis: Jared Dillian
Will Housing Prices Just Flatten — or Collapse?: Jonathan Levin
Fed’s Damage to Housing Market May Last Years: Allison Schrager
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Conor Sen is a Bloomberg Opinion columnist. He is founder of Peachtree Creek Investments and may have a stake in the areas he writes about.
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