Keys to Unlocking Interest Rate Paralysis

TLDR; He hated the house he died in, but he had a great rate. How to avoid a similar fate.

Opening Salvos for the 2024 Spring Real-Estate Market

Waiting for the great interest-rate retreat of 2024. This week, the Federal Reserve announced they still intend to deliver three interest rate reductions by the end of the year, but is waiting for rates to fall really in your best interest?

According to the National Association of Realtors (NAR) latest report, February existing home sales including pre-owned single-family houses, townhouses, condominiums, and cooperative apartments were up 9.5%. Sales still trailed the February 2023 high of 4.53-million-unit rate by 3.3 percent.

Let’s run down the latest challenges to our greater prosperity before we talk about potential opportunities to get a better outcome in today’s market.

The Problem with Interest Rates

A homeowner survey completed by ipx1031.com at the beginning of 2024 showed some big problems for would be home sellers including:

• • 23% of current homeowners want to sell their properties. However, they are hesitant to do so due to the fear of losing their current interest rate.
  • Nearly half (45%) of current homeowners consider their current homes to be their permanent residences, because of their interest rate. Read that again.
  • More than half (51%) are waiting for interest rates to drop before considering a home purchase. 
  • Current interest rates create a buyer/seller standoff where homeowners hesitate to sell, fearing higher rates, while buyers wait for rates to drop; keeping folks stuck in homes they don’t want, or need to sell.
  • People want what other people want. Which is to say, the moment people start coming back to the market, this will likely drive up, or at the least, solidify current prices.
  • If there were to be some type of black swan event impacting the market (read bad thing happening) this might mean a temporary reprieve from expensive real estate pricing and rates. However, how might such an event also impact your ability to make a move? After all, it’s human nature to run out of the building when it’s on fire despite the opportunity to accelerate your wealth generation by going the opposite direction.
  • Are homes in Colorado expensive? Heck yeah! People do AND will continue aspiring to live here for the foreseeable future. Want less expensive housing? Try Saint Louis or Omaha where aspirational costs are less. (Although, the food is considerably better. Just saying.)

Focus on the right property, not the right rate

Staying focused in this market is key to coming out successfully. Meaning, making the best decisions possible based on current market conditions.

You are where you are on your prosperity journey, for better or worse. The economy doesn’t care about your changing life circumstances, or opportunities to thrive, so let’s make the best decisions.

There are some real and opportunity costs associated with waiting for rates to subside. There are. The suggested focus is to be towards finding the right property, not the right rate. Let’s explore what I mean by this…

The real deal on rate reductions

High interest rates are deterring sellers and buyers alike, so let’s look closer at the impact of an interest rate reduction on your principal & interest payment. At the same time you can see just how much it would cost you to buy down the rates in today’s market.

Our interest-rate examples are based on the following purchasing scenario:

• Sales price: $725k
• Down payment: $145k (20%)
• Loan amount: $580k

*The monthly payment savings is the amount your principal & interest payment would be reduced if the rates were lowered by buying down the rate.

Of course, you have to ask, what are the opportunity costs (where could these funds be better used).  For example:

• Would investing the money to buy down the rate be better invested in your home to increase its value or your living experience?
• Would investing the money to buy down the rate better serve you in your retirement account?
• Do I intend to stay in the home long enough to recoup the costs of the discount points?

I’ll be happy when interest rates drop to 5.5%.

Don’t be so certain. Other unforeseeable restrictions, constraints and overall bad shite could accompany those lower rates (i.e. another pandemic)

Ask yourself two simple questions:

1. If you wait for rates to drop a half percent vs just buying down the rate, or accepting a higher rate, do you really think the value of the home you want to purchase isn’t going to decrease?

2. Is it plausible it could increase more than the $6900-$13900 costs to buy down the rate today?

As an aside, there’s also the real possibility you could be paying a buyer’s agent fee too later this year. Let’s not go there just yet though.

Finally, you have to consider that if the market breaks, it will be a zoo of activity, competition and transactions.

You Marry the Sales Price and Date the Rate

You can always refinance the mortgage when rates subside, but the price you pay IS the price you pay and any appreciation gains are based on the sales price of the home.

Also, when you wait for rates to come down, you could miss out on appreciation that could outweigh the incremental savings gained with a lower rate, or worse, you may end up paying more for the home because of the increase in demand, actually costing you more in the long run.

Whether or not you should buy is a personal decision. If you are/need to buy this year, I would consider not waiting for rates to fall.

With each rate reduction delivered from the Federal Reserve, the real-estate market is expected to grow as more buyers and sellers enter the market.

Best case scenario is buying low, paying a slightly higher initial rate to avoid price escalation and then refinancing if/when rates subside.

The best step you can take today is ask an expert mortgage broker to pre qualify you. It’s complementary and won’t impact your credit score, but it will improve your ability to be a stronger buyer when the right property comes on the market.

Until next time.

All my best,
Bryan