Is it a good idea to wait for mortgage rates to decrease before beginning your search for a home Shore?

Many potential homebuyers are patiently awaiting a drop in mortgage interest rates to around the low 6% or even 5% range before making their move into the housing market. However, this strategy may end up being more costly than purchasing when rates are higher, as waiting could pose challenges in finding a suitable home and outbidding competitors for a winning offer.

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On the surface, the idea of waiting for rates to fall may appear financially prudent. For instance, a shift from 7% to 6% could result in a monthly savings of just over $221 on a mortgage for a median-priced home (with a 20% down payment on a $420,000 home and a 30-year fixed-rate mortgage). If rates were to drop to 5%, the savings would exceed $430 per month.

Nevertheless, if you plan to enter or re-enter the market when rates decrease, you won't be alone. Each time rates drop, more buyers become eligible for mortgages and larger loans, leading to increased competition for a limited inventory of homes for sale. Historical trends show that when demand surpasses supply, bidding wars escalate, prices spike, and first-time buyers may find themselves competing against investors and older buyers, often losing out in the process. In such scenarios, higher prices could negate any potential savings from lower mortgage rates.

In terms of price, that is not expected to decrease. The Home Price Expectation Survey (HPES) from Pulsenomics is a great resource to show what experts forecast for home prices over a five-year period. It includes projections from over 100 economists, investment strategists, and housing market analysts. And the results from the latest quarterly release show home prices are expected to go up every year through 2027 (see graph below):

Anticipating a scenario where the economy remains robust, and unforeseen catastrophes are avoided, lower rates may encourage more homeowners to list their properties. However, this surge in supply could be quickly absorbed by eager buyers, potentially exacerbating the housing shortage.

In Cape May County, the most recent sales data from November shows that prices have been increasing year-to-date, which is January 1-November 30 2022 compared to January 1-November 30 2023.  Single Family homes sold in Cape May County have seen an increase of 11%, while condo/townhomes have increased 4%.  

For determined first-time buyers, these factors should be carefully considered. Mortgage rates have already fallen to an average of 6.61%, according to Freddie Mac, and the Realtor.com® economic research team predicts a further drop to around 6.5% in the coming year, likely prompting many potential buyers to enter the market.

While it's not advisable for those who can't comfortably afford today's rates to purchase a home, those who can may find it advantageous to explore the current market. The beginning and end of the year traditionally see slower market activity with fewer competing buyers, and motivated sellers may be more open to negotiation.

For those who do buy at current rates and witness a subsequent rate drop, the option to refinance exists, potentially saving homeowners more money in the long run. Regardless of market conditions, preparing to become a homeowner now by saving for a down payment, improving credit scores, and paying off debt can provide an advantage when the market becomes more competitive.

Touring homes, exploring neighborhoods, and researching recent home sales can help potential buyers gain insights into their preferences, budget expectations, and desired communities. By being well-prepared, individuals can make informed decisions and be ready to make an offer when the right opportunity arises.