Why First Time Home Buyers Should Not Wait for Rates to Drop

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Deciding when to buy a home is often intimidating. This is doubly true when prices are high and choice in your market is limited. In 2018, home prices are increasing in many areas, and the amount of available housing stock is relatively low.

Economic predictions for 2018 anticipate slower home value increases but record low unemployment and high levels of consumer confidence mean more people are thinking about buying. Should you make the plunge yourself? Much depends upon your circumstances and market, but we generally are recommending to first time buyers to buy soon and not wait for rates to go down. Here is why:

#1 Rates Are Headed Up

We have seen many years of low interest rates. Finally, the Fed has been increasing key interest rates in the past year. Even though they have increased rates several times, mortgage rates STILL are in the range of 4%. Economic growth is expected to be strong for the rest of the year and into 2019. Thus, it is expected the Federal Reserve will increase rates at least two to four more times this year. It is likely that mortgage rates will rise well above 4% in 2018 and might even approach 5%.

When this happens, the higher interest rates will affect home affordability. If you decide to wait for rates to drop, we believe it is likely you will be disappointed. All the evidence points to rates increasing soon, and rates having been artificially low for many months. This is not going to last.

It seems unlikely that rates will get any lower than they are right now. We are on economic up cycle that should continue when Trump’s tax cuts really kick in this year.

#2 Prices Are Headed Up Moderately but Steadily

Home prices have shot up in many parts of the country in recent years. The increase in prices has priced some people out of higher cost markets. But home price increases should moderate somewhat in 2018, with an average 3.2% increase this year. This is after a 5.5% increase from 2016 to 2017. Existing home prices in 2018 are expected to rise 2.5% from 2017 to 2018.

How much home prices will increase depends upon the area of the country. On the West Coast, there still could be major climbs in value, while it should be slower growth in the Midwest.

This means the first-time home buyer can probably enjoy slightly slower home price increases this year. It makes sense to buy soon because increased economic growth and the Trump tax cuts may cause home prices to increase faster next year.

Housing Inventory May Rise

There has been a shortage of affordable housing in the US since 2015. Some buyers in hot areas have been forced to spend a lot of money for tiny homes. Other people have not been able to buy at all. But we think that the tide will start to turn in many parts of the US this year, and more homes will be available.

Most of the growth in housing inventory will be in the ranges above $300,000 for most of the country. New construction is also going to increase, but it is going to be slower than before. There is a labor shortage in the construction industry, and restrictions on land and lots. Bank financing for building loans is also tightening, and the cost of building materials is rising.

We still say even if housing stock rises, that you should not wait for rates to go up. Even if you can buy a home at a lower price, the rates are not going to drop much lower than now. If you wait, you could end up being priced out of the market.

Tax Effects Could Have Big Impact

The new tax plan that was introduced at the end of 2017 could have a major effect on the viability of buying a home going forward. Generally, the changes in tax policy by Congress will reduce some of the tax benefits of owning a home. This is the case in higher cost areas in California, New York, New Jersey and Illinois. But on the other side, this could mean fewer people are going to feel motivation to buy. There could be less competition for people who want to buy their first home. Another factor is many taxpayers will see a tax cut, including.

If the impact of the tax policy changes sounds confusing and a mixed bag, it is. It is hard to anticipate how the tax changes will affect things going forward for new home-buyers.

Our gut tells us to take advantage of the very low mortgage rates in early 2018. With higher rates, everything gets more complicated when buying a first home. It is very likely that economic growth will cause rates to rise, and that is the bottom line for why we recommend buying your first home now rather than waiting.

References: Reasons to Buy a Home in 2018

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