Mortgage Rates at 7%: Is This a Good Time to Buy a House?

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Owning a home is still the American dream. Or at least 74% of Americans consider homeownership a key piece of the American dream according to a 2023 survey by Bankrate.

But in the current economic climate with low inventory and interest rates hovering around 7%, is now really a good time to buy a house? This question is one that plagues potential home buyers, and unfortunately, there’s not a blanket yes or no that answers it. Instead, whether it’s a good time to buy is a deeply personal decision that depends on personal financial indicators as well as broader economic conditions.

Assessing market conditions

Since the pandemic, the housing markets have experienced a lot of extremes. It began with home prices spiking as city dwellers fled to more spacious suburban areas. Then, it continued as rising interest rates led to a decline in available inventory since people were less incentivized to sell their homes. These are only some of the market conditions that can impact the state of the housing market, alongside others including:

1-Mortgage interest rates

Interest rates may strain a home buyer, especially when they’ve gone from 3-4% a few years ago to between 6-7% today for the most highly qualified borrowers. While paying for mortgage points (sometimes referred to as Discount Points) could help offset some of the pain of higher mortgage rates, it’s still quite a different purchasing decision than it was just a few years ago. As mortgage interest rates rise, there are implications for a homeowner’s willingness to sell (supply) and a prospective buyer’s interest in purchasing (demand).

2-Supply and demand dynamics

Thanks in part to rising interest rates, supply chain issues from the pandemic era, and numerous other factors, the supply of available homes in the U.S. is simply not enough to meet demand, at least not at comparable price points.

The National Association of Realtors® (NAR) reported in April 2023 that to meet the housing demand for households with an annual income of $75,000, there would need to be 319,460 more listings with a maximum price range of  $256,110. Unless more supply is created in price ranges that the average American can afford, home sellers are likely to continue to receive multiple offers, especially for lower-priced properties.

3-Home affordability

Since the pandemic, affordability has fluctuated, with homes generally becoming less affordable for the average family as interest rates have risen. NAR’s home affordability index for April 2024 is 95.9, which means that an average family making the median income has only 95.9% of the income necessary for a loan on a median-priced home, assuming a 20% down payment.

Affordability is highly subject to region, and NAR’s data on affordability shows that homes in the West are generally far less affordable for the average family than those in the Midwest. However, it’s important to note that each individual’s financial situation largely determines affordability, and what’s affordable for one family may not be affordable for another just down the street.

Evaluating personal finances

If you’re in a stable financial situation, you may be in a far better place to buy a home despite the broader economic conditions. As you evaluate your situation, consider the following:

1-Available savings for down payment and closing costs

While you may be able to roll closing costs into the loan with some mortgage lenders, the down payment is money you’ll need to pay upfront. As home prices have risen, down payments have done the same, with an average down payment of nearly $50,000 at the end of 2023. Saving up a down payment can take years, so it’s critical to develop a plan based on the percentage down payment you want to make and the cost of the homes you’ll be interested in buying.

2-Debt-to-income ratio and affordability

Lenders consider the debt-to-income (DTI) ratio as a critical factor in your ability to take on mortgage debt. A DTI ratio below 36% is generally viewed most favorably by lenders. To calculate your DTI ratio, divide your monthly debt payments (not including rent if you’re a first-time buyer) by your gross monthly income. If your ratio is above 50%, you’ll want to work on quickly improving your ratio by increasing income, paying off debt, or both.

3-Credit score and mortgage eligibility

Your credit score will impact the interest rate you can get on a mortgage and your eligibility. While the exact credit score you need to qualify for a mortgage varies by lender, most conventional loans require a score of at least 620. The highest credit scores often result in the most favorable interest rate and monthly payments.

4-Job stability and income prospects

Over the past several years, layoffs have become the norm, with people taking six weeks to six months or more to find a new position. When you’re taking on a huge financial commitment like a mortgage, you’ll need to ensure your job is stable enough to support payments or that you have an emergency fund to cover the mortgage for a few months if you’re suddenly out of work.

5-Future expenses and financial commitments

As you run the numbers to determine whether buying a house makes sense for you financially, you’ll want to consider your season of life and future expenses. If you’re expecting a new child and plan to put them into daycare after a period, it’s smart to quote the price of daycare and see how that monthly expense will factor into your budget. Similarly, if your grown children are about to head off to college, determine how much you want to spend on their education and how that will shift your available income.

Working alongside a financial advisor is one of the best ways to weigh all of life’s competing priorities and truly understand if now is a good time to buy.

Understanding the impact of external factors

While some aspects of home buying are within your control, like your credit score and if you’ve been able to save a down payment, there are also economic indicators and macroeconomic trends that could influence your ability to buy a home regardless of how much work you do to get your personal financial situation in a good place. These external factors can include:

1-Employment outlook

The Congressional Budget Office (CBO) predicts that the unemployment rate will rise slightly in the coming years from a 3.6% annual average in 2023 to a projected 4.5% annual average by 2030. An increase in unemployment alongside a slowing economy could signal trouble for workers, especially those who are in positions that could be eliminated by the rise of artificial intelligence (AI).

2-Interest rate environment

The CBO estimates that economic growth will slow in the coming year, and they expect the Federal Reserve to respond with lower interest rates. However, even if the federal funds rate comes down in late 2024 or 2025, it may take months or years for home buyers to see the low rates they enjoyed in the early pandemic and pre-pandemic days.

3-Inflationary pressures and housing market stability

The CBO predicts that inflation will slow in the coming years, with the consumer price index (CPI) projected to fall from 3.2% in 2023 to 2.2% by 2026. However, these predictions are only hypothetical until prospective home buyers begin to see more affordable home prices. In April 2024, the median home price was $407,600, according to NAR, which is up 5.7% from one year prior.

Forecasting future market trends

While nobody truly knows what the future holds, especially in a volatile arena like the housing market, experts continue to make predictions. Before you use any expert testimony as a reason to buy, it’s important to consult with a financial professional who can weigh the advice alongside your unique financial situation.

NAR’s Chief Economist predicted in early 2024 that by the end of the year, we’ll see a slight decrease in interest rates to an average of 6.3%, and as a result, more inventory will come on the market and lay the groundwork for a market recovery. However, in June 2024, we have yet to see the Fed pull back on interest rates, so it remains to be seen whether buyers will get any breathing room from current rates by the end of the year.

A panel of housing experts surveyed by Fannie Mae also expects to see the “lock-in effect” weaken through 2024 and into 2025. The lock-in effect refers to current homeowners who are waiting to sell until interest rates fall because giving up your sweet 3% interest rate is a tough pill to swallow. Additionally, these experts believe multiple converging factors could “offer a glimmer of hope that the peak of the housing affordability crisis may be behind us.”

Expert opinion aside, whether it’s the right time to buy a home is ultimately a choice each individual prospective buyer needs to make. And making the right choice requires a diligent review that includes current financial circumstances, like the size of a down payment, alongside forecasted mortgage payments at various interest rates. In addition to the financial factors, a buyer will need to consider personal factors such as life events, job stability, and, more generally, the desire to move vs. stay for a period.

While now might be the right time for you to buy a house, it may not be a great time for your colleague or neighbor. The reality is that home ownership is a personal decision, and it’s often best to assess your unique situation alongside a team of professionals, which may include a financial advisor, real estate agent, attorney, or accountant.

Disclaimer: Article content is intended for information only. It may not reflect the publisher nor employees’ views. Consult a mortgage professional before making financial decisions. Publishers or platforms may be compensated for access to third party websites.

Contact Information:
Name: Sonakshi Murze
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