Should homebuyers wait for rates to fall or make a move now?

Affordability may be tightening – but holding back could prove damaging in the long run

Should homebuyers wait for rates to fall or make a move now?

US mortgage rates have remained resolutely high in recent weeks – and stretched housing affordability is seeing plenty of would-be buyers pause their purchasing plans, according to a recent survey.

The Bank of Montreal’s (BMO) Real Financial Progress Index, whose latest update was released at the end of April, showed almost three quarters (71%) of prospective buyers are waiting on interest rates to fall before they push ahead with a move.

That finding arrived with fully 73% of Americans who aspire to own a home saying the goal seems unattainable at present, and 60% noting increased concerns over the past three months about the cost of living.

With no sign that the Federal Reserve is prepared to cut interest rates anytime soon, buyers are likely to be waiting a while longer – at least throughout the summer – for that outlook to change, according to BMO’s deputy chief economist Michael Gregory.

He said the US economy’s continuing strength and “stubborn” inflation were likely to push back the Fed’s timeline to bring rates lower, likely into the autumn, with a “gradual rate cut pattern” to take hold throughout next year.

Why holding back could prove a risky move for would-be buyers

That’s not to say that potential buyers have turned their back on the market entirely, with Rachel Clark (pictured top), co-owner of the Houston-based Firehouse Mortgage, telling Mortgage Professional America that while rates remained high, they had been somewhat steady in recent weeks – offering purchasers a degree more certainty about the outlook.

“We’re seeing it pick up a little,” she said of first-time homebuyer activity. “Rates kind of levelled off a little. It’s not drastic swings as people felt like were happening… we’re seeing people kind of pick up and it’s like, ‘OK, I’ll take that rate.’

“It’s one of those things too: we try to tell people, ‘It’s not necessarily the rate. You don’t need to focus on the rate – let’s focus on what your monthly payment is. What do you want your monthly payment to be? What kind of house do you want? How many bedrooms?’ Those kinds of things.”

Fixating too much on the rate, Clark said, means some borrowers are dissuaded by supposedly high borrowing costs and lose sight of the fact that they could feasibly afford the mortgage.

“When you take the rate out of the equation, if the monthly payment is where it needs to be and the house is what they want, then some people are like, ‘Well, what does it matter what the rate is if I can afford it?’” she said.

It’s also a case of setting expectations for clients who might have an idea of their ideal monthly payment without realizing that rates are unlikely to drop significantly, or as dramatic as during the COVID-19 pandemic, in the coming months.

National home prices, meanwhile, are expected to continue ticking upwards – meaning some borrowers holding out hope for a lower potential monthly payment could ultimately see their personal affordability outlook worsen.

“It’s also having those conversations with people [who] say: ‘I want my payment under $2,000, or right at $2,000,’” she said. “You’re looking at $300,000 houses – that’s just not going to happen.”

Waiting could mean that property costs an additional $15,000 to $20,000 when rates finally do drop. “It’s kind of making them understand that the rate is the rate – but your monthly payment is more of what you’re going to be concerned with.”

Homebuying aspirations remain strong despite current struggles

Other noteworthy trends to emerge from BMO’s latest survey include the finding that a growing number of would-be homeowners intend to use their 401(k)-retirement plan to help fund a home purchase, with 30% of all prospective buyers having to consider retirement savings to boost affordability.

Home insurance costs are also putting the squeeze on Americans’ ability to buy. Forty-three percent (43%) of respondents to the survey said those rising costs could negatively impact their ability to buy or keep a home – and Gen Z (60%) and millennial (55%) respondents were especially likely to report strained affordability because of home insurance.

Still, homebuying dreams remain largely undimmed despite the bruising overall outlook. For 67% of survey respondents, homeownership remains “one of their biggest aspirations in life” including a significant cohort of millennials and Gen Z Americans.

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