Should You Wait Until Mortgage Rates Fall to Buy a Home? No, Here’s Why.

Those numbers might make someone shopping for their first home want to hunker down and wait out the market. Maybe home prices will take an impactful dip, and bring along some bargains. And if mortgage rates were historically low as recently as last year, why not wait for that cycle to come back around?

In truth, first-time homebuyers can’t wait out this market. And not just that—if they are able to afford it, they’re looking right now at the best opportunity they’ve had in several years to land a new home.

That might seem counterintuitive. After all, home values have grown 41% since March 2020, and—between that and the recent jump in mortgage rates—monthly payments on the typical U.S. home have shot up 73%. That’s an added $800 per month in places like Kansas City, and a whopping $3,390 a month in the Bay Area.

But remember this: As home prices were skyrocketing through the pandemic, first-time buyers not only were struggling to keep up with the rising down payment and monthly costs, they were also bidding against a huge number of repeat buyers who were flush with equity and inspired to move.

Now, the surge in interest rates has caused homeowners to reconsider. Why downsize if moving from a 3% to 6.5% mortgage rate doesn’t help your monthly budget? Instead of upsizing, tapping equity to pay for an addition might suddenly be more cost-effective.

As current homeowners crunch those numbers and decide to stay put, the share of first-time buyers has rebounded from 37% to 45% in the past year. That rate is likely climbing. Stymied first-time buyers who can still afford to bid and close are in a better spot now than they have been in months. Not only are new buyers less likely to face bidding wars against all- or mostly cash offers, they’ll have more options to choose from, more time to decide and more negotiating power. They might even get a discount from the list price.

Which brings us back to waiting. Given these conditions, why not sit tight and see if prices fall further, or if mortgage rates take a meaningful drop?

Let’s start with prices. Home-value growth is slowing everywhere, and prices are even falling in some places. But that’s because homes have become so expensive to buy—not because people don’t want to buy. Inventory is ticking up, yes, but perhaps more important is that new listings have pulled back. Recent inventory growth can be explained by the same homes sitting on the market longer. Homes that sell are going pending in about 16 days, which is slower than last year but much faster than before the pandemic.

That tells us that while the market is moving more slowly, we are nowhere near having an oversupply of homes on the market, which would be necessary for a significant price fall. We’re severely underbuilt as a country, and there are millions of millennials and zoomers who have entered or are about to enter their prime home-buying years. They’ll renew their efforts to buy as prices soften, and in the process ensure any correction is mild. In a recent Zillow survey, a panel of housing economists and experts projected annual home value growth of 2.6% in 2023, 2.7% in 2024, 3.7% in 2025 and 4% in 2026. That’s back to normal historical growth; it’s not anywhere close to significantly falling prices.

So now a potential buyer might be thinking: Even if prices don’t meaningfully fall, the skyrocketing is over. Maybe I should wait and see if mortgage rates come back down. After all, rates have been incredibly volatile these past few months.

The sub-3% rates we saw through the pandemic were abnormal. They aren’t coming back any time soon, especially with the U.S. Federal Reserve still outlining a lot of inflation-control work remaining. The Fed owns a mountain of mortgage-backed securities, and for now it has opted to let them mature in their own time rather than trying to sell them off quickly. But if and when the Fed does decide to unwind its balance sheet, that will likely drive rates up even higher. There certainly were plenty of people who thought they’d wait out rates when they climbed to 4% and then 5% earlier this year, and they have only gone up since then.

Perhaps more important, remember that these higher rates are what’s keeping that huge swath of current homeowners from becoming buyers. So if a first-time buyer does try to wait out rates and is right that they fall significantly back down, they’re suddenly back to competing against all those previously rate-locked upsizing and downsizing homeowners who have an equity advantage in a bidding war. And they’re also bidding against a huge chunk of other wannabe first-time buyers who have been forced to the sidelines by affordability as rates rose. In a new Zillow survey of prospective buyers, conducted by The Harris Poll, 78% said they would speed up their home search if rates dropped to 4.5% or lower.

In that demand-rush scenario, prices probably shoot up again, there’s frenzied competition, and the right home becomes hard to find and even harder to win.

Don’t forget a third consideration: Waiting isn’t free. Rents have been growing nearly as quickly as home prices through the pandemic. That makes it harder to save for a larger down payment, and also gives an extra incentive to lock in a monthly mortgage payment that you know won’t grow 5% or more each year like a new lease will.

It’s true there are millions of people who simply can’t afford to buy right now. But those who can and want to buy their first home shouldn’t feel paralyzed by the shifting market. This recent bit of extra breathing room is an opportunity to slow down a bit and find a home they love. If mortgage rates do eventually come down, a lower payment is a refinance away.

Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to ideas@barrons.com.