I often get asked – Is this the right time to buy property? This is a million-dollar question which has flummoxed the experts too. House prices have stopped responding to mortgage rate increases.
The housing market has shown unpredictable behavior in response to the Federal Reserve’s rate-hiking campaign. Traditionally, mortgage rates increase with rate hikes, leading to declines in home prices. However, despite ten rate hikes, the housing market is experiencing confusion. Mortgage rates have likely peaked, but home prices continue to rise. The Fed raised its benchmark interest rate to combat high inflation. When interest rates rise, banks charge higher rates to consumers, affecting mortgages and other loans. Mortgage rates increased in anticipation of the rate hikes, reaching a peak of 7.08% in November. Currently, mortgage rates are at 6.81%. The median price of existing homes in May decreased compared to the previous year but increased on a monthly basis. Factors other than Fed policy also influence mortgage rates, such as 10-year Treasury note yields. The spread between Treasury yields and mortgage rates has widened due to economic uncertainty. The uncertain economic outlook and inflation above the Fed’s target could lead to more rate hikes and potential recession.
The lock-in effect caused by higher mortgage rates has reduced housing inventory, as homeowners are reluctant to give up low rates. Housing inventory is down by a third from pre-pandemic levels. The housing market is still recovering from the Great Recession, and the slow pace of new home construction contributes to low inventory. Demand remains high due to a strong labor market and higher wages. Overall, the housing market appears unusual because of these factors.
Back to the question, is this the right time to buy? The underlying demand for housing is huge. The house prices have not responded to increase in interest rate, but they will jump when the interest rates start falling. Yes, it is a good time to purchase your dream home or investment property before the frenzy sets in again. As Warren Buffet says “be fearful when others are greedy, and greedy when others are fearful”.