Is my article title confusing? If you’ve been visiting the site for any period of time, it shouldn’t be. Like anything else, the best time to purchase is when something is on sale.
Expected price drop
There are a few factors at work here, currently. The Federal Reserve has been pumping interest rates for the past few months in order to cool inflation. At time of this writing, the average 30-year fixed rate was 7.32% according to Bankrate. To put this in perspective, my main home has a 2.125% rate on this same product, and I have a rental property at 3.675%. Both these loans were created in 2020.
The expected, and reasonable, market reaction resulting from increased interest rates is a less motivated and capable group of home buyers. That’s exactly what we’re experiencing today. Millennial’s and Gen Z specifically, have never experienced interest rates this high, and they’re sure to look shocking at face value. Their purchasing power is diminishing and it’s absolutely terrifying, and rightfully so.
We’re also starting to see news of mass layoffs, initially hitting tech giants Meta, Amazon, and Twitter, but quickly spreading to slightly less prominent companies such as DoorDash, Roku, HP, and CNN. Inevitably, these mass layoffs will remove potential home buyers from the market as they’ll be busy hunting for new jobs or standing in the unemployment line.
According to Gregory Daco, Chief Economist with EY-Parthenon, the U.S. has seen a slowdown in the pace of hiring, however, it’s still positive overall at this point.
How to hedge yourself against disaster
Before I preach that the next 3-12 months could be an AMAZING time to buy a house, I’d like to cover some fundamental personal finance principles first.
- Make sure you have an emergency fund. Layoffs have started, and if you’re in an industry that is prone to layoffs, you may want to consider building one if you haven’t already.
- Backup plan. Everyone should have a backup plan. I’m talking about for your job, not your marriage!
- Keep a trim budget. The best way to successfully navigate a potentially life-changing situation, is to have a lean budget. By doing this, you’ll always be ready to side-step disaster.
- Plan, Plan, Plan! I’m a huge fan of planning. Make sure you thoroughly plan all aspects of your finances (this is where you start planning to buy a house during a dip).
When crisis and opportunity meet
Albert Einstein famously stated that “In the midst of every crisis, lies great opportunity,” and he certainly wasn’t wrong. When home prices dip, and at some point they inevitably will, people that have planned properly will have a great buying opportunity that could pave the way for the next 50 years of their life.
“In the midst of every crisis, lies great opportunity”Albert Einstein
Interest rates won’t stay high forever, and neither will home prices. If you buy at a low price with a slightly higher interest rate, you can always refinance at a later date. If the interest rate is so terrible that you lose some sleep over it, then you should put more money down. But whatever you do, don’t miss the giant opportunity that could be presented in the next 3-12 months.
Remember, markets work in cycles, and you can always use “hindsight” to kick yourself over the moves you did and didn’t make. What you should do instead is prepare to take advantage of actual price drops compared to the highs of 2021 and early 2022. In order to take advantage when the time is right, you need to be ready to jump.
Things you can do today
Clearly the housing market is still inflated, so you probably aren’t ready to buy today. But you might be wondering if there is something you should be doing in the meantime while you’re not currently shopping for a home. Well, you’re in luck, because there is!
- Get your credit in tip-top shape to get the best rates
- Continue saving down payment money (typically 20% of purchase price) in an account that is not prone to market fluctuations, like a high yield savings account
- Become intimately familiar with the area(s) you are looking to buy in
- Have a good Real Estate Agent lined up
- If you have a current home that you’re going to sell, start preparing for that sale
- Eliminate any big items that adversely impact your debt to income ratio (EXAMPLE: you have a car payment that is $700 a month, but you only have $3k left on the car; consider paying this off)
- Start asking friends and families for mortgage broker/lender recommendations
By planning ahead, you’ll be adequately prepared when the time comes to jump! Buying a house is a huge decision, and certainly isn’t one you should have to approach blindly. It is our hope that the Wealthy Idiots can make the task a little less daunting.