Whether you're in the market for a new home to live in or for one to use as an income source, you may be wondering if now's a good time to buy. Not only are home prices quite inflated, but inventory is extremely low, which means you may have to duke it out with other buyers to get an offer accepted.
The state of the housing market might also lead you to worry whether a crash is coming -- especially in light of rising mortgage rates. But should you hold off on buying for fear that home values are about to tank? Here's what you need to know.
Home values aren't poised to plummet
Home values will likely start to decline in the not-so-distant future simply because today's prices aren't sustainable. That especially holds true these days, what with mortgage rates rising.
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In the course of the past three months, borrowing rates have risen sharply, due in part to the Federal Reserve raising interest rates. While the Fed doesn't set mortgage rates, an uptick in the federal funds rate can send consumer borrowing rates in a similar direction. And so it's fair to assume that mortgage rates will continue to climb in 2022.
Now last year, buyers had the benefit of lower mortgage rates to help offset sky-high home prices. Right now, those record-low rates are off the table, and we shouldn't expect to see them return anytime soon. Because of that, buyer demand is likely to wane. And once that happens, home prices should start to come down.
But does that mean home prices will absolutely tank overnight? That's doubtful.
There's clearly been a lot of demand for homes, as evidenced by the fact that buyers have stretched their budgets to pay these high prices for them. And rising mortgage rates may not impact demand to such an extreme degree that it sends home prices crashing.
While mortgage rates are higher right now than what borrowers were able to enjoy from mid-2020 through late 2021, on a historical basis, they're still quite competitive. Freddie Mac reports that in February, the average 30-year mortgage rate was 3.76%. Compare that to February 2021, when the average 30-year mortgage rate was 2.81%, and that reads like a huge jump.
But if we go back to February 2019, the average 30-year mortgage rate was 4.37%. And 10 years earlier, in February 2009, it was 5.13%
And those rates are a bargain compared to what borrowers faced in the 1990s. Back then, rates in the 7% to 8% range were not at all uncommon.
The point, therefore, is that rising mortgage rates should not lead to a near-term housing market crash. While home values might drop, we're more likely to see a gradual decline than a drastic one.
Buyers and investors may want to sit tight
While property owners don't need to panic about plunging home values, those looking to buy -- whether for investing purposes or occupancy purposes -- may want to hold off and see how the next few months play out. There's a good chance home prices will drop in the course of 2022, so if you're not in a rush to buy, waiting could mean spending less on a home.
Will waiting mean facing higher borrowing rates? Potentially. But home prices could drop enough to more than make up for that.
