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How do mortgage interest rates affect affordability? 

Over the last few years, the housing market has seen almost everything: countless cash offers, uber-competitive bidding wars, unpredictable mortgage rates and more. From the pandemic shifting work-life balance, to a surge in institutional homebuyers (aka investment firms buying homes), there’s no shortage of explanations for the current state of the housing market.

Whatever reason you ascribe it to, the outcome — a 40% increase in U.S. home prices since 2020 — has made things especially difficult for first-time homebuyers . The good news is that it looks like we might be turning a corner. In August, list prices in the U.S. dropped 5% from the all-time high set in May. However, list prices are only part of the equation. Mortgage rates are still high, and we likely have a long way to go before we get back to normal (or whatever that looks like now).

Where does that leave current homebuyers? That’s a complicated question. Ally Home President Glenn Brunker shared his thoughts on the state of the housing market and what its future might look like.

Preparing for the unpredictable

While signs are pointing to a shift from a seller’s market, nothing is guaranteed. Even as prices come down, most homes are still selling in around 30 days, which is significantly faster than the three-month average of pre-pandemic times. “Don’t forget, the cost of your mortgage isn’t just the sale price,” noted Brunker. “Prices might be going down, but rates are on the rise. So, if you’re in the market for a home now, waiting might not save you as much money as you think.”

These elevated rates are causing many would-be homebuyers to second guess themselves. It’s understandable. For the last two years, people have been bracing for a downturn that didn’t come. Many sold their home in 2020 and 2021 thinking that was the peak. Now they’re stuck trying to buy in an even higher-cost market.

What’s the solution? Brunker recommended a shift in mindset. “People are understandably shocked by the recent increase in interest rates. They’ve nearly doubled since last year, but maintaining perspective is important. These are still historically low levels.” In fact, it’s the lowest rate the U.S. has seen since 2014.

The reality is no one can say for sure what’s next or where rates go from here. You could watch and wait on the Fed as it maneuvers around inflation to bring rates down (most likely in a couple of years), but that’s a short-term approach. In fact, home values tend to do well in times of inflation, so it’s not without its benefits.

As tempting as it might be to try to get ahead of the market or wait it out, the best approach is the one that helps you meet your financial goals. Don’t let the daily details of the housing market distract or derail you from your big picture.

What about first-time homebuyers?

While no one is immune to these factors, most new homebuyers have not lived through this landscape, so it’s particularly unfamiliar territory. Don’t be discouraged. Now is still a good time to buy, especially as inventory goes up and the space gets less competitive. Just make sure you’re putting yourself in a strong equity position. Brunker explained, “For first-time homebuyers, there can be a rush to get into the market, but if you’re stretching to own that can hurt you in the long-term.”

Yes, you could have the opportunity to refinance later on with a lower mortgage rate, but that might not be an option. In the meantime, you’ll have to make those payments plus the countless other expenses that come with homeownership. Don’t get too focused on the future and overlook your current financial needs and limitations.

A home is generally a long-term investment (so play the long game). If you’re being priced out of the housing market right now, it’s OK to wait. Rent might be on the rise, but in most U.S. metro areas it’s still cheaper to rent . Find the right fit for you and your financial goals.

We’re all in this together

While first-time homebuyers might be feeling the current housing market challenges the most, the impact of these factors is ubiquitous. In recent years, uncertainty has become the status quo in many aspects of our lives. It can be easy to feel powerless against these unpredictable elements. Remember, the one tool you’ll always have is time. Set your goals, stay your course, remain flexible and always be ready for the unexpected.

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Image of Glenn Brunker, President of Ally Home.

Glenn Brunker
President, Ally Home

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