If you've been considering buying a new home but have been wondering whether it's better to wait for home prices or mortgage rates to fall before jumping into the market, you're not alone.

It's a question I’ve been asked repeatedly, especially over the past few months.

With that in mind, I wanted to share some thoughts and ideas with you on where home prices and mortgage rates are likely heading in the next few months so you can make the home-buying decision that’s best for you and your family.

Watch the following video, or continue reading below, to learn more;

As you know, home prices and mortgage rates have soared over the past 18 months. So much so, that talk of a housing market crash, or bursting bubble, intensified by the end of last year.

As a result, many potential home buyers withdrew and adopted a wait-and-see attitude.

Without a doubt, for many, the Frisco real estate market became unaffordable, but as we move further into 2023 without a housing market crash, it’s becoming apparent that a crash isn’t going to happen, so where does that leave you?

Will Home Prices Decline?

If you’re someone who has decided to wait until home prices decline before buying, you might be waiting for quite a long time. I don’t say that just to say that. If I thought the market was going to decline I’d tell you.

I say that because Frisco home prices have already declined and are on their way back up!

Ironically, home prices in Frisco declined between July and November 2022, before many of the dire predictions of a market crash were reported.

One of the challenges of predicting the housing market is that you won’t actually know if prices have peaked, or hit bottom, until after they already have.

Unlike many areas of the country, we haven’t yet surpassed the peak we hit in April 2022, but prices are trending upward and in July the median sales price was 5.8% higher than a year ago.

That doesn’t mean home prices are appreciating quickly again. The gain from last year is more due to the fact that prices were declining last year than they are appreciating this year.

Home prices are a result of supply versus demand. Although demand fell sharply when mortgage rates crested 7% last year, supply unexpectedly fell as well as homeowners became unwilling to trade their 3% mortgage for a 7% mortgage.

Here is a look at the current housing supply compared to the amount of supply over the past 5 years;

The saving grace in our local market is the amount of new construction we have. Without the supply new construction brings we would find that prices would be rising much faster.

Did you see the report from Wallethub last week?

McKinney and Frisco were ranked the #1 and #2 real estate markets in the country for 2023 based on 17 different factors including strength of the local economy, employment, and long-term prospects.

Attention like that is only going to add to the number of people moving here meaning the chances of any meaningful price declines in the next couple of years is unlikely.

Could that change? Absolutely, but there is nothing in any of the data currently to suggest that price declines are on the horizon.

So if home prices are unlikely to fall, that leaves mortgage rates.

Mortgage Rates and Affordability

The good news for anyone considering buying a home is that mortgage rates impact monthly payments more than home prices do.

While both are important, a lower mortgage rate will move the affordability needle faster than a lower home price will. A 1% decline in mortgage rates is approximately the same as a 10% price reduction.

Since it doesn’t look like we will see any meaningful price declines in the near future, changes in the mortgage rate are likely the key to saving money when buying a new home.

Does that mean you have to wait for mortgage rates to fall before buying?

Not necessarily, as mortgage rates can be bought down. Let me explain.

The Frisco real estate market will offer some opportunities between now and the end of the year for those who are able to take advantage of it.

Due to seasonality, overall activity, and prices, usually decline in the fall and early winter. Homeowners who have their homes on the market in the next few months are usually more motivated to sell.

That will present an opportunity for those able to take advantage of it. Rather than focusing just on a lower price, one strategy is to ask the seller for a closing cost contribution that can be used towards a mortgage rate buydown.

One option is to utilize a 2-1 buydown program.

Let’s assume mortgage rates are 7.25%. With a 2-1 buydown you would need to qualify for the loan at 7.25%, but the rate would actually be bought down for the first 2 years. In year one, the rate would be bought down by 2 points, so your payment would be based on a 5.25% rate. In year 2, the mortgage rate would be 1% lower so the payment would be based on a 6.25% mortgage rate. In years 3 through 30 the rate would revert back to the original 7.25% rate.

The idea behind this loan program, considering mortgage rates are expected to decline over the next two years, is the loan would be refinanced at a lower rate before year 3.

The second option is a permanent rate buydown. While more expensive than the temporary buydown explained above, just like the name suggests, the mortgage rate would be bought down for the life of the loan and prevent you from having to refinance in the future unless rates fell substantially.

The advantage of a permanent buydown, besides the lower payment for the life of the loan, is you qualify for the loan at the lower bought-down rate, rather than today’s higher rate. This makes the dream of homeownership easier to obtain for those who have been frozen out by today’s high mortgage rates.

How Do I Know Mortgage Rates Will Fall?

While nobody knows for sure what home prices or mortgage rates will do in the future, history does provide clues.

Historically, mortgage rates follow the same trend as inflation, with a lag. Here’s a graph showing the mortgage rates and inflation over the past 50 years.

As you can see, when inflation goes up, mortgage rates follow, and when inflation drops, so do mortgage rates.

If you look at the far right-hand side of the graph you will see that inflation has been falling, but mortgage rates have yet to follow, but they will😀

Bottom Line

Only you can make the decision that’s best for you and your family. Hopefully, this information will help you make an informed decision.

If you would like to discuss making your goal of homeownership a reality, let’s schedule a call.

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