Inflation and Interest Rates - Should You Buy a Home Now?

Between inflation, increased prices, and rising interest rates from the Federal Reserve, it can sound like doom and gloom is waiting for anyone searching for a new home these days. It has left a lot of homeowners asking, should you buy a home now or “wait it out” for a better rate? A look into the past and a quick projection into the future will show you, there’s a smart choice to be made right now, and less to be afraid of than you might think.

Why are Interest Rates Rising?

In the past two years, the Federal Reserve bank (the Fed), brought interest rates on loans to historic lows due to an unprecedented global event – the pandemic. In that period, never-before-seen supply chain issues and shortages rocked every industry, including homebuilding, driving prices up while interest rates were low.

Demand for homes, on the other hand, has remained strong. As Morgan Stanley puts it: “Following the financial crisis, new home construction virtually came to a halt. While it has steadily improved, it is still a long way from its peak in late 2006 and not nearly enough to meet continued demand from Millennial and, now, Generation Z buyers in their peak nesting years.” As of writing (July 2022), the Fed is raising rates back up to try to address this high demand. That has many potential homebuyers nervous about signing off on a long-term mortgage and cementing their rate now, but there are several reasons that home ownership is the smart choice in the current market.

Your Defense Against Inflation

Because it’s real estate with real value, a home is more likely to provide a better return on investment than any savings account with an interest rate that’s less than the rate of inflation. Securing the real value that a home provides has traditionally been the best hedge against the future in an inflationary economy.

High demand for housing and a growing number of built-to-rent developments are adding to the value of real estate, as well as the scarcity of land and property. Buying new secures a property for you to enjoy now, in a home that is more likely to maintain its value for longer, and it lets you start building equity there. If the market does cool down and the average interest rate of a fixed-rate mortgage goes down significantly, you can refinance and use the equity you’ve built to continue paying off your home at the new lower rate.

Interest Rates Then and Now

When it comes to interest rates and your monthly payment, a look back into the data shows that even the raised rate of today is miles away from interest rates in years past. Per Freddie Mac’s records, 30-year fixed rate mortgages had an average interest rate as high as 18% in 1981, dropping to about 8% in 1990, and today, the average is as low as 5.70% – with other financial products available at even lower rates. And, there’s another factor that will protect your investment and help you grow real equity regardless of the status of the market – one which you can leverage later to great effect.

Growing Prices, Higher Value

With homes still in shorter supply in the face of demand for the next several years, we will continue to see a rise in home prices. Any wobbles in pricing over the next few months are just the market gaining stability from the unprecedented increases of the last 24 months. Steady increases over 2023 will bring higher equity and net worth to those that don’t wait to buy, while creating more issues around qualification and affordability to those who do delay past this current correction. Buying now doesn’t just lock in your immediate interest rate, it locks in a steady course for a greater overall financial position for years to come.