No More Amazing Deals? The Reality of Home Buying Amidst Rising Rates

Interest rates have brought a near-freeze to the housing market. The latest National Association of Realtors data shows just 3.9 million existing homes were sold in September, a 15.4% drop from the same time a year ago.

The Federal Reserve has hiked the federal funds rate 11 times since 2022 to cool inflation. Those rate hikes have caused mortgage interest rates to rise, climbing from 2.7% in November 2020 to 7.5% right now. 

The rising rates have essentially wiped out any possibility of home buyers finding a great deal on a house, and it's still unclear where the housing market goes from here. 

Cheap housing is nearly non-existent right now

To give you an idea of how much interest rates have affected housing affordability, let's look at the price of a theoretical home with two different interest rates. If you bought a $350,000 house in late 2020, had a 20% down payment, and were able to score an interest rate of 2.7%, your monthly mortgage payment (principal and interest) would be about $1,136. 

But if you bought a similar $350,000 home right now, with a 20% down payment with interest rates at 7.5%, you'd pay $1,958 per month. That means buying a home of the same price today is $822 more per month than just three years ago. 

If that weren't bad enough, the home prices have also soared over the past few years. The pandemic set off a buying frenzy in the housing market that has wreaked havoc on prices. The average selling price of a home was $337,500 toward the end of 2020, but it has since climbed 27.7% to 431,000. 

Adding even more fuel to the fire of housing costs is the fact that the price of homeowners insurance has also increased dramatically. Homeowners insurance prices are up 21% nationwide over the past year.

How to prepare to buy a home in this climate 

Home affordability is the worst it's been in 40 years, according to mortgage technology company Black Knight. Clearly, it's not a great time to buy a house.

First-time home buyers and many others are sitting on the sidelines, waiting for interest rates to fall. There's no telling when that will happen, and the Federal Research has indicated it's still open to raising rates further if inflation doesn't continue to make progress. Still, some experts think mortgage rates will be much lower by the end of 2024.

Still, you may need, or just want, to buy a house right now. Here are a few things you should do to help your situation: 

• Save as much money as possible: This applies to any time you're considering buying a home, but it may be especially important now. The more money you have for a down payment, the lower your monthly mortgage payment will be. 
• Shop around for a mortgage lender: Not every lender looks at your financial situation the same way, and not all will offer you the same mortgage terms. That means you could get a better interest rate by comparing lenders. 
• Consider new construction: One place where you still may find a lower interest rate is by purchasing a new construction home. Some large home builders offer discounted rates if you get a mortgage through their preferred mortgage lender. 
• Shop around for homeowners insurance: With the rapid rise in insurance prices, comparing insurance companies to ensure you're getting the best deal is more important than ever. 

While finding a great deal on a house may be out of the question, following some of these suggestions could help put you in a better position when you're ready to buy a home.