When the calendar switched from 2022 to 2023, I had one major thing on my to-do list: buy a new house. Our family of five had quickly maxed out our four-bedroom, one-bathroom home, and we were eager to move into a space that would better suit us all. We'd been working on getting all of our ducks in a row up — until the beginning of April, when some of the country's top economists started warning of a looming recession, and I suddenly was asking "Should I wait to buy a house?"
Those warnings were especially alarming to me as a freelance writer who purchased her first home just before the subprime market crash in 2008, and after several painful conversations (most of them about how we'd manage juggling that single bathroom for another year), my husband and I decided that it may be a wiser choice to wait and see what would happen with the economy. As it turns out, we're not alone in our risk-averse approach to buying a new home.
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After speaking with Pablo Vadillo, a real estate agent out of San Francisco who runs a team of agents in the Bay Area and Silicon Valley, I learned that we aren't alone in our fears.
What Has Changed in the Market?
I'm not the only one planning to hold off and see what the final quarter of 2023 holds. Vadillo says that he's seeing homebuyers pulling out and putting off moves due to the uncertainty in the 2023 market, especially in his region, where tech layoffs are creating tension and uncertainty. "The other contributing factor is the interest rates being at 6 percent, [when] just 2 1/2 years ago they were half of that — so it's a pretty tough pill to swallow. If you're not ready for that financial commitment or if you got caught up in the hype of the 2 1/2 and 3 percent interest rates, you're going to be disappointed."
Though Fannie Mae is forecasting that 30-year interest rates will drop to 5.7 percent in Q2 of next year (dropping from around 6 percent now), it's of course only a forecast. Still, that could be the difference of hundreds of dollars in your mortgage payment per month by just waiting it out.
Reduced Purchasing Power
Another major factor causing borrowers to press pause on their move is purchase power. With increased interest rates comes reduced buying power. While you may have been able to comfortably swing a $400,706 home (the median price according to Redfin) back in 2020, today's interest rates are pushing that out of reach for so many. "Because purchasing power has gone down, we're seeing people pull out of the market and put off moves," Vadillo says, adding that many people's aversion to recent rate hikes needs to be put in better context.
"Most people think that the interest rates right now are outrageous, and that's really due to recency bias," he continues. "If you look at interest rates on a historical average from 1990 to 2020, the historical average during that time was 5.86 percent." If you look at today's rates, which are hovering between 6 and 6.50 percent, we're only slightly higher than the average."
Does Vadillo think that now is still a good time to buy? Well, that depends on what matters most to you. "If the interest rates are the biggest factor, you need to realize that interest rates right now are really just average," he explains, adding that rates alone shouldn't be enough to hold you back.
Should You Move If You Have a Low Interest Rate?
If you're like me and currently have some of that 2020 pricing (my interest rate is currently under 3 percent), it may seem foolish to sell and lock into a 6.5 percent interest rate, but Vadillo says we may not be looking at the big picture. "What it really comes down to is the rate of appreciation," he explains. "Is that difference in the interest rate justifiable enough for the appreciation of the property? This is where having a great realtor who knows the market, has studied the patterns, and knows how things fluctuate can give you some great insights."
Vadillo says it's important to remember that while you may be moving from a 3 percent interest rate to a 6 percent rate, you may also be moving yourself and your family into a neighborhood that appreciates much more than that 3 percent or even into a home with that much-needed extra bathroom (or two). "In the long run, while it might be temporarily costing you money out of pocket, you could actually be seeing greater appreciation over time."
Being Cautious vs. Overly Worried
The best way to avoid recession fears and overcome worries about doubling your interest rate is to take a good, hard look at your own finances, according to Vadillo, who says that a good real estate agent's job is to look at your preapproval and help you decide how much you can reasonably afford.
"Our goal as agents is to put you in the best financial situation possible," he says. "So, if you're nervous or if you have a nervous client, the biggest thing to understand is: What is it that's making them nervous? Is it the monthly payment? Is it the commitment to being tied to a property for the next 30 years? Is it the risk of it all? And usually, what we find out is people get nervous of the unknown. What makes them nervous is feeling like there's something that's going to be uncertain or unexpected throughout the purchase or even through the ownership of the house."
An Ever-Changing Economy
"We advise clients not to stretch their budget," he says, adding that it wasn't always a popular approach, especially from 2020 to early 2022, when people were offering hundreds of thousands of dollars over asking to land their dream home. "We educate our clients to never overpay for properties by studying the market with them and going through the facts and reality of that neighborhood's economy. And we had to be really, really patient through the process."
That patience paid off for borrowers who listened. "Nowadays, you start to see these news articles that say 72 percent of homebuyers [who] bought during the pandemic actually have buyer's remorse and that 80 percent of pandemic buyers had to compromise priorities," he says, adding that it's because they moved too fast and got themselves into situations that they weren't ready for.
"My biggest advice is to go out and get educated," he continues. "There are a lot of different programs. There are a lot of different methods that can help alleviate the nervousness and the fear. The nervousness and the fear usually just come from a lack of confidence or a lack of knowledge. So, go arm yourself with that knowledge — go take a real estate agent out to coffee (we love coffee, by the way) and ask your questions."
How to Prep for the Future
Unfortunately, I'm still not too confident about the idea of buying until I know how the market shakes out. Vadillo says that I (and other people like me) should take this opportunity to get a leg up on the 2024 real estate market, including making upgrades around the home — landscaping, power washing, and paint upgrades can all make a huge impact — and auditing our finances so we're ready to make a move as soon as we've grown comfortable with the changing real estate market.
"It's not a race," he adds. "I know the American dream is the single-family home and the white picket fence. But don't rush into something because you're comparing your insides to somebody else's outsides."
Everyone's financial situation is different, and usually, people are a lot closer to their dream of homeownership than they think. "They just don't know how close they are because they've never taken the time to do the research or to get the education," says Vadillo.