When Do Rising Interest Rates = A Great Time to Buy?

When I bought my first house, back in the Dark Ages, a friend told me “This is a great time to buy. Rates are down to 8%!” 

And I thought “cool.” I knew nothing about interest rates. If they said 8% was a great rate, I believed them. So when I secured a seven year balloon mortgage at 6.75%, I felt like I was stealing money.

Little did I know that rates would drop into the 5’s, the 4’s, the 3’s and even dip into the 2’s.

But what goes down, apparently must come back up. Or so says the Fed. The result in the real estate world is that mortgages have jumped back into the 5’s as of today. Still less than the 6.75% that I thought was stealing money. But quite a shock for buyers who were accustomed to the 3% range.

“So, of course this is a terrible time to buy, right?”

Not necessarily. In fact, there are plenty of indications that this is a good time to buy.

First of all, now you can buy. Over the past several years, we’ve been dealing with a market with virtually no inventory, and hence multiple buyers fighting over every listing. Buyers had to offer sellers way over asking, and waive nearly every contingency. Even then buyers were walking away frustrated, and eventually giving up.

With the rate hikes, there is now less competition. We still have roughly the same number of properties going on the market every week. But we have fewer buyers. Listings aren’t necessarily selling the first weekend. We’re seeing price drops. Average sold prices are not dropping, but sellers stuck in the exuberance of the previous market still think they can price the properties stupid high. The current market doesn’t tolerate stupid high pricing.

Also, with less competition, sellers won’t have the same leverage to demand you drop the inspection and appraisal contingencies. They may even accept an offer below their asking price.

I know, higher mortgage rates mean less buying power. But more buying power wasn’t doing buyers any good when they couldn’t buy because of the insane market competition.

Second, sellers are now entertaining offers from FHA and VA buyers. That opens the market up to a whole new category of buyers who were shut out before. And, last I looked, FHA and VA loans were priced at about a point lower than conventional mortgages.

And third, help is available. Lenders — at least the good ones — are developing programs to assist buyers. My favorite, Home Mortgage Alliance, is offering a $2000 cash credit which can be used to buy down the rate, as well as a “lock before you buy” program to protect you while you shop. And when rates come back down, you can refinance and drop down with them.

“But aren’t prices going to drop?” Well, my crystal ball is in the shop. But I’m not willing to bet on it. At least here in the Denver market, the fundamentals remain strong. We are still in a strong sellers' market. We went from having two weeks of inventory to five weeks. Just to get to a balanced market we would have to have six months of inventory. I am convinced that inventory is going to remain tight. Sellers won't be too excited about swapping their 2.5% mortgages for 5.2% (or higher) mortgages. Some will, because they have compelling reasons to move. But many who don’t will just stay put. And tight inventory keeps prices high. I do think prices will stabilize somewhat with the end of the bidding wars. Maybe I’m wrong. But maybe I’m right . . .

“But still — the rates are so much higher!!” I know. It’s a shock. But am I sorry I bought my first house at 6.75%? Not at all. I sold it three years later for about 10% more than I paid for it, and parlayed that into my second house, which I once again sold three years later for about 30% more than I paid. And so on. And over the years, I refinanced my way down into the low 3’s. 

People have been buying, and making money on, real estate at all different interest rates for as long as there has been real estate to sell. I know, I’m one of them.

The thing is, rates aren’t going to go down anytime soon. In fact, in the short term, they will keep going up. The Fed has announced their intention to raise them again, probably several times before the year is over.

So if you’ve been thinking of buying, now might be a good time to pull the trigger.

As always, call me if I can help. Or if you want to go out for cocktails or ice cream.

Happy Summer!