With borrowing rates ticking up and recession looming, some prospective homebuyers are getting cold feet. On the other hand, interest rates will almost certainly climb higher, so should you lock in a deal on a home you love and buy a house now?
Tough call, experts say. Why? "There are many moving parts in buying a home," said Long Island, N.Y.-based certified financial planner Peter Palion.
Mortgage rates, housing markets, personal savings, credit scores, investment goals and job prospects are all key considerations.
Timing the housing market is difficult. Still, industry watchers have hinted recently that the red-hot housing market could soon cool off and tip in favor of buyers.
"When the summer ends, I think when fall comes around, it's not going to be anywhere as frothy as it's been," Palion said. "Anybody who can hold off and wait can probably score a better deal."
Demand for homes has far outpaced supply in recent years, leading to sky-high prices. Covid pushed up prices further. While it was hard for real estate agents to show houses during the pandemic, demand still outstripped supply, since homebuilders had to pause construction. But rising borrowing rates in the last several months could stem the tide.
Rising Mortgage Rates: Should You Buy A House Now?
On June 15, the Federal Reserve hiked interest rates by three-quarters of a basis point, the highest increase in nearly three decades. The Fed does not set mortgage rates, but changes in the Fed rate indirectly push mortgage rates higher or lower.
The 30-year fixed mortgage rate, which had been hovering around 3% throughout 2021, is now closer to 6%.
As a result, Fed Chairman Jerome Powell said, "I would say if you're a homebuyer, or a young person looking to buy a home, you need a bit of a reset."
It turns out that consumers were already on the same page. Fannie Mae on June 7 revealed a national housing survey that shows only 17% of consumers report it's a good time to buy a house.
"Consumers' expectations that their personal financial situations will worsen over the next year reached an all-time high in the May survey, and they expressed greater concern about job security," said Doug Duncan, Fannie Mae's senior vice president and chief economist in a statement.
Home Prices Still Hot; Is A Slowdown Coming?
At $407,600, the median existing-home sales price exceeded $400,000 for the first time in May 2022, according to the National Association of Realtors.
Kenneth Leon, director of equity research at CFRA Research, says that shows it's still a competitive housing market.
"There is still a lot of bidding for existing homes," he told IBD.
However, sales declined month-to-month in three out of four regions of the U.S. And year-over-year sales fell in all four regions. The Northeast was the only region to see an uptick in May vs. April.
Overall, existing-home sales fell 3.4% in May vs. April. They declined 8.6% vs. a year ago.
"Home sales have essentially returned to the levels seen in 2019 — prior to the pandemic — after two years of gangbuster performance," said NAR Chief Economist Lawrence Yun in a statement.
Homebuilder Stocks
CFRA's Leon concedes that homebuilders are bracing for a slowdown in the coming months. He points to not only homebuilders' outlook for the next several quarters but also commodity prices.
In an earnings call with investors recently, Lennar management said traffic to its selling communities declined significantly.
"So far in June, new orders, traffic, sales incentives and cancellations have worsened in many of our markets due to a rapid spike in mortgage rates and headwinds from negative economic headlines," co-CEO Richard Beckwitt said.
KB Home also said new orders were coming in at a slower pace.
"We did see a softening in May as cancellations increase," said COO Robert McGibney in a June 22 earnings call with investors. "June, I would say, has been similar to May, where we've seen some ongoing softness over the last couple of months."
KB Home management says price increases also slowed in May, while incentives picked up in certain regions, which bodes well for homebuyers looking for deals.
Meanwhile, as housing supply catches up with demand, lumber prices are declining from all-time highs of around $1,400 per 1,000 board feet in March to around $600 in recent days.
"The story has changed," he said. "Lumber is down back to normalized levels."
Nevertheless, homebuilder stocks have been resilient amid a volatile stock market and even as the housing market softens. Shares of Lennar and KB Home, which had fallen significantly from 52-week highs in late 2021 and early 2022, have rebounded in recent weeks, according to MarketSmith chart analysis.
Recession May Be Just Around The Corner: Should You Buy A House Now?
If the U.S. is heading into recession, the question remains how bad it will be. A short and mild recession wouldn't have a huge impact on the housing market, Leon says. But a prolonged slump would almost certainly create havoc.
"The one positive is that employment is still strong," Leon said.
But that too can change, as news of layoffs have crept up in recent weeks. For homebuyers, that means not only having to evaluate the financial impact of losing a job, but also the likelihood of moving to accept a new offer.
Buying a home represents a major commitment, Palion says.
"It's not something you can walk away from easily next month because things have changed," he said. "Consider the stability of your employment and family situation."
For anyone who faces a one-in-three chance of moving to another part of country within three to five years, Palion suggests carefully weighing the option to rent instead.
How Much Can You Really Afford?
Mortgage rates are a key component to calculating what you can afford to buy. So are income, how much savings you have socked away, your credit rating and ability to cover other recurring and unexpected costs of owning a home.
One way to figure that out, is to consider the NAR's quarterly housing affordability index. The most recent data show that the typical monthly payment for homeowners in the first quarter of 2022 was $1,383, representing 18.7% of family income. That compares with the Q4 2021's average monthly payment of $1,237, comprising 17% of household income.
Generally speaking, a 20% down payment is ideal, Palion says. But remember that putting all your savings into a down payment is not ideal. Repairs and property taxes can sneak up on first-time buyers, often putting them into deeper debt than they anticipated.
Another way to curb house-buying costs is to boost your credit rating. The higher your credit rating, the lower the cost of borrowing.
With rising mortgage rates, prospective homebuyers might opt to wait a little, make more regular payments on other debts, like credit-card balances and car loans, thus boosting their credit rating.
Where Should You Buy Real Estate?
In a perfect world, the place you want to live and what you can spend line up perfectly. But that's not always the case. So some house hunters opt to move to a more affordable part of the country.
According to the most recent NAR data, the West is the most expensive region to be a homeowner. Average monthly payments are around $2,200 and account for more than 28% of family income, with the average family taking in around $93,000. The median price of an existing home in the West is almost $526,000.
The Midwest is the most affordable region to buy a home, with monthly payments around $1,200, consisting of about 17% of family income.
Should You Buy Rental Property Now?
Buying investment property is a "whole other ball of wax," Palion said.
"There is a big distinction between investment property and a primary residence," he said.
Buying a home in which you will live is more about satisfying personal preferences, Palion explained.
"An investment property needs to be first and foremost a business decision; how much are you paying for this property and what is the rent that you can collect?" he said.
The time and money you will continue to invest in rental property after the purchase are also big distinctions. Owning rental units means you have to be involved in the day-to-day details of managing the property to some extent, even if you contract out a big chunk of the management.
"You need to be able to take the calls at midnight about the toilet overflowing," Palion said.
If you want to be a totally hands-off investor, consider investing in real estate investment trusts, or REITs, instead Palion suggests. REITs are collections of property that hire professional manager and trade like any other stock.
Whether you're considering buying a primary residence or an investment property, Palion has one last piece of advice: "Chill out; take it easy. Don't make rash decisions."
Follow Adelia Cellini Linecker on Twitter @IBD_Adelia.
