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Should I Buy Now or Wait? What Homebuyers Should Know in Today’s Market.

Should I Buy Now or Wait

If you were to ask the average Californian if now is a smart time to buy a home, their response would probably be along the lines of “Now? With the current mortgage rates?”

According to a recent poll by the BMO Real Financial Progress Index, at least 71% of prospective home buyers are waiting on rate cuts to enter the market. This is a 64% jump from this time last year, indicating that more and more first-time home buyers are feeling nervous about today’s rates. 

However, that same survey also found that most people say owning a home is one of their biggest aspirations in life, even if that goal sometimes feels unattainable. 

However, the truth is that mortgage rates are not particularly high right now – at least in comparison to historical data. The average rate fell around 7.5% at the time of this article’s publication, and although rates were below 4% just a few years ago, rates above 6% are not historically unusual. 

This brings us to the point of this blog post: if you’re waiting for current mortgage rates to drop before buying a home, that might not be the best move. Let’s talk about why. 

How Mortgage Interest Rates Work 

In the simplest of explanations, mortgage interest rates represent the cost of borrowing money to purchase real estate, expressed as a percentage of the loan amount. 

These rates directly affect the monthly payments and the total amount paid over the life of the loan, influencing affordability and purchasing decisions. The higher your rate, the more interest you’re paying monthly and over the course of your loan. 

What many people don’t realize is that there are many factors that influence mortgage rates. Some of the most notable ones include… 

  1. Inflation: Higher inflation typically leads to higher interest rates as lenders demand compensation for the decreased purchasing power of future repayments.
  2. Monetary Policy: Central banks, like the Federal Reserve, influence rates through policy decisions. Raising the federal funds rate often leads to higher mortgage rates.
  3. Economic Conditions: Strong economic growth can lead to higher rates due to increased demand for loans, while economic downturns might result in lower rates to stimulate borrowing.
  4. Supply and Demand: The availability of credit and the demand for mortgages also impact rates. High demand or limited supply can push rates up, while low demand or abundant supply can drive them down.

No matter when you start to look for a home, evaluating current mortgage rates requires an understanding of their historical context. Rates have fluctuated significantly over the decades, influenced by broader economic trends and policy decisions. 

Historically low rates might seem high without this perspective, underscoring the importance of comparing today’s rates with long-term averages to make informed decisions.

This brings us to our next point: why it might actually be a good idea to purchase real estate with today’s mortgage rates. 

The Advantages of Buying a House Now 

Despite interest rates not being at historic lows, they remain favorable compared to many past periods. The average rate falls between 6% and 8%, but in decades past, interest rates have peaked as high as 18.63%

That means now is arguably a strategic time to invest in a home, particularly in California where real estate has shown consistent long-term value appreciation. This is a solid long-term investment, but there are other significant benefits that come with purchasing sooner rather than later. 

Firstly, owning a home provides stability. Unlike renting, where rent can increase annually, a fixed-rate mortgage ensures predictable housing costs, allowing for better long-term financial planning.

Homeownership also offers security and a sense of permanence. You have control over your living space and are not subject to the uncertainties of rental agreements. At the same time, you can benefit from various tax deductions that will significantly reduce your taxable income. 

Perhaps most importantly, real estate is a key component of wealth-building. Paying down a mortgage builds equity, which can be leveraged for future financial opportunities. Historically, California homes have appreciated, providing homeowners with substantial returns on their investments.

At NeighborWorks Orange County, we help aspiring homeowners in California understand all of this. That’s why we run a free virtual HUD-Approved Homebuyer Education Course to familiarize participants with the home-buying process. 

If you’re interested in buying a house this year, we can help you explore the advantages via pre-purchase counseling. We also invite you to attend our Homebuyer Fair on July 13, 2024. 

Debunking Common Misconceptions 

In our line of work, we hear plenty of myths and misconceptions spread about the California housing market. It’s not just that people think interest rates are too high – let’s talk dispel some of the inaccurate rumors floating around. 

Myth 1: The Housing Market is About to Crash

Fears of an imminent market crash, reminiscent of the 2008 financial crisis, are largely unfounded. California’s housing market is underpinned by strong economic fundamentals, including a diversified economy, ongoing population growth, and a housing shortage. 

In fact, data from the California Association of Realtors shows stable price increases and low foreclosure rates, indicating a resilient market. The bottom line: if you’re hoarding your pennies in hopes of jumping when the market crashes, you might be waiting a long time (and losing out on the benefits of homeownership in the meantime). 

Myth 2: Renting is Always Cheaper than Buying

While renting may appear cheaper in the short term, it does not offer the same long-term financial benefits as homeownership. Homeowners build equity and benefit from property appreciation, and if you’re always renting, you’ll miss out on this opportunity. 

Over time, the cost of renting can exceed the fixed costs associated with owning a home, especially in high-demand areas like California.

For example, consider a two-bedroom apartment in Los Angeles, renting for $2,500 per month. Assuming a 3% annual rent increase, the monthly rent would be approximately $3,364 after 10 years. Over that decade, the total rent paid would be around $340,000.

Conversely, purchasing a similar home for $600,000 with a 20% down payment and a 30-year fixed mortgage at a 4% interest rate would result in a monthly mortgage payment (including principal and interest) of around $2,300. Adding property taxes and insurance, the monthly cost might be about $3,000. 

After 10 years, the homeowner would have paid approximately $360,000, but importantly, a significant portion of that payment would have gone towards building equity in the home, rather than being entirely lost as rent.

Myth 4: You Need a Perfect Credit Score to Buy a Home

Lastly, many potential buyers believe they need an excellent credit score to secure a mortgage. 

In reality, various loan programs exist to help those with less-than-perfect credit. FHA loans, for example, are designed to assist buyers with lower credit scores. According to the Federal Housing Administration, borrowers with credit scores as low as 580 can qualify for loans with a down payment as low as 3.5%.

Learn More With NeighborWorks Orange County 

There’s no way around it: homeownership comes with a big price tag. However, don’t believe everything you hear about the state of the current mortgage rates and California’s housing market. 

Instead, take the opportunity to educate yourself. At NeighborWorks Orange County, we’re committed to providing tools and resources to help your future home be a wealth-building asset, not a financial liability. 

If you’re thinking of taking out a mortgage loan, or if you’re wondering if that’s a possibility for your future, we’re here to help. 

Join a free HUD-Approved Homebuyer Education Course or sign up for pre-purchase counseling. As we mentioned earlier, you’re also welcome to attend our Homebuyer Fair on July 13, 2024. 

In the meantime, happy house hunting, and let us know if you have any questions! 

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