House Hunters Are Heading Back Into the Market. Here's Why.

Higher mortgage rates aren't scaring everyone.

There's a reason so many prospective home buyers chose to sit out the real estate market in 2022. Last year, mortgage rates rose sharply at a time when home prices were also quite elevated.

Things aren't all that different today. Mortgage rates are still relatively high -- and they're a lot higher compared to where they sat in 2021. Home prices, too, are elevated -- though they've cooled nicely in many markets.

The latter factor may be fueling a recent uptick in home buyer demand. A recent tweet by Redfin said, "House hunters are wading into the market as mortgage rates and home prices decline. Our home buyer demand index hit its highest level since last May while mortgage loan applications increased for the fourth week in a row."

Although today's mortgage rates are definitely not a bargain, they're not quite as high as they were during the last few months of 2022. And with home prices dipping modestly, it's easy to see why buyer demand has increased.

But should you move forward with a home purchase now, given where mortgage rates are? The answer might boil down your personal financial situation and the price you're able to snag on a home.

Make sure your home is affordable

As a general rule, your monthly housing costs, including your mortgage payments, property taxes, and homeowners insurance premiums, should not exceed 30% of your take-home pay. If you can manage to buy a home that allows you to stick to that limit, then you may feel comfortable buying a home, even in today's market.

Plus, you might manage to get a relatively good deal on a home if you're buying one in an area where inventory has picked up nicely, or if you have a motivated seller who's willing to make concessions to find a buyer in short order. That could mean being able to purchase a home for $325,000 that would've sold for $360,000 one year ago.

Of course, there's still the matter of higher mortgage rates to contend with. But as long as you're able to keep your housing costs to 30% of your take-home pay or less, you don't have to sweat those as much.

Mortgage rates fluctuate all the time. And while they've been hovering in the 6% range since the start of the year, in time, they have the potential to creep downward. Once that happens, you may be able to refinance your loan into a new one with a lower interest rate. The result? Lower monthly payments to look forward to.

Meanwhile, if you start out with monthly mortgage payments you can afford and then those payments shrink, you'll get to a much better place. So don't write off the idea of buying a home today just because you're looking at a higher interest rate on a mortgage than you'd like.

Focus on home prices rather than rates

Mortgage rates are not necessarily set in stone, because the option to refinance a home loan is out there. That's why, in the course of your search, you may want to focus on home prices instead.

It's possible to sign a mortgage at 6.25% today and eventually knock that rate down to 4.75%. But if you buy a home today for $325,000, that's the purchase price you're stuck with. So you'll need to make sure it's one that's both reasonable and affordable for you.