When is the Right Time to Buy a House?

Many potential homebuyers attempt to predict if home values are rising or falling while also paying attention to mortgage rates. These can be important metrics to follow and we’ll take a look at what should be expected going forward, but there is a catch. (For more information on buying a home, see: A Guide to Buying a House in the U.S.)

30-Year Fixed Rate Mortgages

The 30-year fixed mortgage rate is important because it’s the most stable option for homebuyers. The interest rate will be higher than a 15-year loan (popular for refinancing), but the 30-year fixed presents no risk of future rate change shocks. (For more, see: How to Get the Best Mortgage Rates.)

The 30-year fixed is currently 3.92%. This has been somewhat surprising to many people because the Federal Reserve stopped purchasing mortgage-backed securities, which was done to drive down mortgage rates in order to make homes more affordable in 2014. This ended six years of quantitative easing, a process in which a central bank purchases securities from banks to create high levels of liquidity at those banks, thereby driving interest rates down.

A year ago, the 30-year was 3.45%. Rates have hovered between 3 and 4 percent since 2012. The trend has clearly been down for quite some time, but it looks like that might be about to come to an end. The biggest names in the market are fully expecting rates to move higher in the future. Consider the following predictions for the 30-year fixed:

All of these forecasts have mortgage continuing to climb beyond 2018. If these predictions come to fruition now is the time to buy a home. And with the economic recovery in full swing, it only makes sense that this prediction will come true. But there’s another factor at play. (For more, see: Forecasting Mortgage Rates: Buy, Sell or Refi?)

Affordability

The most recent Housing Opportunity Index report released by the National Association of Home Builders indicated that 60.3% of homes were affordable in Q1 2017. This is based on 30-year fixed rates, good credit and the annual median income for metropolitan areas as calculated by the Department of Housing and Urban Development.

It’s good to see that the majority of homes are affordable, but this isn’t a good number on a relative basis. For instance, in Q1 2016, 66.5% of homes were affordable. In Q1 2013, 73.7% of homes were affordable. There is a disturbing pattern taking place, which is an increase in the price of homes without a parallel increase for income levels. This isn’t sustainable and it could lead to a decline in home prices. If this happens it would present a better buying opportunity in the future. However, this isn’t a guarantee and what if mortgage rates move higher while you're waiting? (For more, see: Buying a Home: Calculate How Much Home You Can Afford.)

Best Approach

The best approach is to buy a home when you can afford it. Don’t attempt to time mortgage rates and home values. They’re almost impossible to predict. If you find the home you want and you can afford to, buy it. (For more, see: How to Buy Your First Home: A Step-By-Step Tutorial.)

When you do buy that home consider the following money saving tips:

  • If you plan to resell in the future, don’t buy the biggest and/or most expensive home on the block. These homes usually appreciate the least and present the biggest challenge when attempting to find a seller. The smallest and/or least expensive home on the block often appreciates the most.

  • Inquire about property taxes, utility costs and home owners association fees.

  • Hire an inspector prior to purchasing a home. This will cost you hundreds and might save you thousands.

  • Don’t make any large purchases (car, boat, etc.) or open a new credit card in the six months leading up to your home purchase. This might be seen as an increased risk to your lender. (For more, see: What is a Good Credit Score?)

  • When you bid for the home you want, base it on comps on a price-per-square-foot basis. Use a specific number which will indicate to the seller that you did your homework in determining the value of the home.

The Bottom Line

There’s a saying on Wall Street: “Don’t try to time the market.” This also applies to real estate. The number one factor is your ability to afford a home without getting in over your head. That being said, if you’re looking for an edge, interest rates are near historic lows so now appears to be a better time than most for purchasing a home. (For more, see: How Interest Rates Affect the Housing Market.)