Like opening and closing a faucet increases and decreases the water flow, lowering interest rates increases home sales, and raising interest rates decreases home sales.
When home sales increase during periods of limited inventory, demand increases, and prices go up. Contrarily, when home sales decrease, demand could lessen and prices moderate.
There is an opportunity with higher rates because it affects sales and demand, which in turn keeps prices in check. By waiting for rates to come down, and no one knows by how much but certainly not to the 3-4% range, buyers' pent-up demand will affect the already low supply and cause prices to increase.
Let's look at a scenario where you could buy a home today for $1,000,000 with a 90% loan at 6.5% for 30-years with P&I payments of $7,212. If interest rates drop to 5.5% in one year but in that same period, the price goes up by 10%, the price would be $1,100,000 with a 90% loan at 5.5% for 30-years with P&I payments of $7,285.
The payment would actually go up $73 a month and the price would have risen by $100,000 which means $10,000 more towards the downpayment compared to the person who purchased a year earlier with a higher rate but lower price.
Purchase Price | Mortgage | PITI + PMI Payment |
$1,000,000 | $900,000 @ 6.5%/30 yr | $7,212 |
$1,100,000 | $990,000 @ 5.5%/30 yr | $7,285 |
The takeaway in this example is that a person may experience more loss from unrealized equity during periods of high appreciation than waiting for a nominal drop in the interest rate. With rates being a deterrent to buyers that have led to sales slipping 22% year over year in March 2023, sellers may be willing to negotiate.
It seems counterintuitive but higher interest rates may be the help you need to buy a home.
