Waiting for interest rate relief may not be a good strategy

REAL ESTATE

“I’m waiting for rates to come down.”

There are plenty of people sitting on the real estate sidelines right now with that thought repeating in their heads. Fannie Mae’s Home Purchase Sentiment Index shows just about a quarter of Americans think that it’s a good time to buy a house.

It’s understandable, with mortgage rates hovering around their 20-year high and memories of 3% or even 2% rates fresh in potential buyers’ minds. While they wait, however, would-be buyers could be setting themselves up for disappointment.

First and foremost, buyers need to abandon the false hope that interest rates will return to, or even approach, the historic lows of the early 2020s. It is unlikely that we will see mortgage rates below 3% or even 4% in the reasonable future.

Mortgage rates bottomed out four years ago because of unique circumstances, which most of us would rather not repeat. Even with current interest rates where they are, New Hampshire’s housing market remains brisk. It is more realistic to expect that we will see rates come down a point, maybe two if the economy slows, but certainly not by three or four points.

While inflation has proved sticky, the laws of physics still apply. What goes up — interest rates — must eventually come down.

Many real estate professionals still believe that the Federal Reserve will cut interest rates in the next 12 months, which sets up the likelihood of a refinance boom.

Those who’ve financed a home with an interest rate above 7% will jump at the chance to lower their monthly payments, and those with equity in their homes may be able to shed private mortgage insurance, further reducing their costs. That’s great news for homeowners. For potential buyers, there’s a caveat. Lower interest rates make purchasing a home more attractive, but they also make the market more competitive.

It’s important to understand the difference between higher home prices and higher mortgage payments. A higher interest rate will increase the cost of borrowing.

Seven percent on a $450,000 mortgage is going to cost more per month than 7% on a $250,000 mortgage. But it’s not interest that drives the list price of a home. In fact, the opposite tends to be true. When money is cheap to borrow, more people jump into the market for the same limited supply, driving up prices. It’s inventory, not interest, that has the biggest influence over prices.

Unfortunately, the housing supply shortage in New Hampshire will continue to challenge the market no matter what interest rates do. Prices were steadily trending upward for more than a decade when an influx of pandemic movers caused them to spike. That frenzy has settled down, but demand for housing in New Hampshire remains high with no real change in sight.

According to a 2023 New Hampshire Housing needs assessment, the state must create 60,000 new housing units by 2030 and 90,000 new units by 2040 to keep up with estimated population growth. To sufficiently address this shortage, we need much more housing or far fewer residents. Inventory is a long-term problem that will take years to solve. Current potential homebuyers can’t wait that out.

Affordability is a real issue that most Americans need to seriously consider when thinking about buying a home and, it is certainly ill-advised to take on a burdensome monthly payment. But when interest rates are factored into the discussion, remember that they change.

In fact, they are always changing. And when they go lower, people can — and many do — refinance. The question, then, isn’t whether interest rates are too high to buy a house right now. The question is, what’s the cost of waiting?

Matthew Neuman, Esq., is a real estate attorney and the managing member and co-founder of Absolute Title, a full-service title insurance company with offices in Bedford, Concord and Portsmouth.