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January 16, 2023
With housing prices continuing to fall, potential homebuyers are feeling more confident about purchasing a home1. Home prices have been falling in this changing housing market since June 2022.
Historically, factors that impact mortgage interest rates include broader economic conditions, monetary actions of the Federal Reserve to tame inflation, and the bond market.
Housing is perhaps the industry most affected by the central bank's efforts to cool the economy, and recent rate increases have propelled mortgage rates to more than double their levels from a year ago.
Where do Home Prices Go from Here?
Some good news could be that falling home prices and less competition for available houses could offset higher rates. Nearly a quarter of homes for sale experienced a price cut which is double the year before2.
New data is showing that home prices in the United States are falling. Economists expect a decline of around 5%-10% from the peak reached in June through March of 20243.
Additionally, existing home prices have fallen for nine consecutive months while the supply of single-family homes is growing4.
Kieran Clancy, a senior U.S. economist at Pantheon Macroeconomics, estimates that existing home prices will keep dropping by about 20% from their June 2022 peak5.
Homebuyers who want to capitalize on falling home prices but also want a lower initial rate may want to consider doing an ARM. An Adjustable-Rate Mortgage (ARM) is a type of mortgage with an interest rate that changes (adjusts) throughout the life of the loan – after a fixed rate period.
Here, borrowers lock in a low mortgage rate for 5, 7, or 10 years, then the interest rate changes periodically thereafter, based on the market at the time. With a conventional ARM, the rate changes every 6 months.
ARMs typically offer lower rates compared to a 30-year fixed loan term, often resulting in a lower monthly mortgage payment.
The Right Time for You
Deciding whether to buy a house is one of the biggest financial decisions you’ll ever make. Your credit score is something that you should have in order before applying for a mortgage because it impacts the interest rate you would be offered. When determining your budget beyond the down payment and closing costs, be sure to factor in things like property tax, insurance, and possible homeowners’ association dues.
No matter what the market conditions may be now, ultimately the right time to buy is when the time is right for you. Regardless of current rates or market conditions, there are always sellers who for one reason or another – some of them unforeseen – must sell their home.
Plus, with options like doing an ARM for a lower initial mortgage rate as well as dropping home prices, the timing could be right for you to snatch up your dream home at a discount.
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