To call today's housing market a tricky one would be a huge understatement. These days, the real estate market is sorely lacking in inventory, and that's giving sellers a huge upper hand.
Not only are home prices today sky-high, but they're being further elevated by bidding wars, which remain common, given how limited inventory is. In fact, what's often happening is sellers are listing their homes for above-average prices, only to then sometimes get a good 10% more on their already inflated prices once a bidding war kicks off.
But as much as it's clearly a tough time to be buying a home -- whether to live in yourself or as a real estate investment -- sitting things out and waiting until next year means taking the risk that mortgage rates will be even higher than they are today. The question is whether that is a risk you should take.
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What's the right call?
The Federal Reserve is moving forward with a series of interest rate hikes that could make mortgage borrowing even more expensive over the next year. To be clear, the Fed doesn't set mortgage rates directly. Rather, it sets the federal funds rate, which is what banks charge one another for short-term borrowing purposes.
But when the Fed raises rates, it tends to trickle down to consumer borrowing rates across the board. So, in the coming year, we could see it get more expensive to carry a balance on a credit card, take out a home equity line of credit (HELOC), or sign a mortgage to purchase a home. And that makes the case for locking in a home loan sooner rather than later.
Despite that fact, most buyers are better off waiting a year to purchase a home for one key reason: Right now, there really aren't affordable homes on the market, and mortgage rates are already high. So, if you buy now, you get the worst of both worlds -- high home prices and high borrowing rates.
On the other hand, if you wait a year to purchase a home, property values could drop to more moderate levels by then -- especially if rising mortgage rates result in buyer pullback that lessens demand to a notable degree. Plus, throughout the next year, more homes could hit the housing market, thereby narrowing the gap between supply and demand.
Granted, there's no guarantee that homes will be more affordable a year from now, as inventory could remain sluggish. There's also no guarantee that mortgages will be more expensive, though that's a likely scenario.
But we do know for sure that those who buy homes right now will lose out on all fronts. They'll pay more, spend a lot to finance a home, and, most likely, get stuck settling for a space that's less than ideal due to such a massive shortage of inventory. Waiting a year gives some of these issues time to work themselves out, thereby putting buyers in a potentially better position than they're in today.
