Yes you heard it, interest rates are rising. Some experts are suggesting to hold back from buying a house, to wait for prices to come down. But does that really make sense?

Over the past 24 months, interest rates have been at historic lows, which was one of the triggers to the highest inflation rate in over 40 years.

Since the residential real estate market exploded, buyers have been competing with each other, as well as Wall Street institutions in some markets, as much as $50,000 to $80,000 over asking price. Borrowers were also waiving appraisal contingencies and inspection periods.

In other words, for the last two years it has been one of the absolute most competitive, worst buying markets in history.

Let’s look at some math at what offering $50,000 over the value of a home would cost you over a 30-year period. Using the prevailing interest rate of one month ago, which, on average was about 4.8%, that would cost an extra $296 per month.

Now let’s take a sales price of $300,000 with principle and interest payment of $1,805 at a rate of 6.1%. Let’s use the same 4.8% rate from one month ago at 4.8%. That same mortgage payment would be $1,580 or $225 higher.

In the first example, going $50,000 over asking price, it would cost you an extra $296 dollars per month—plus your $50,000 savings is gone!

Breaking It Down

Now let’s say you were going to wait for a year or two and continue to rent until the market cooled down further.

Right now, the average rent in the United States is $,1827 per month. By waiting 12 months you lost $21,924, didn’t build any equity, and lost some potential valuable tax write offs—all to avoid $225 per month higher in the above example.

Sometimes you have to break down everything, not just the emotion of the herd and the so-called financial experts.

Soon, you will have motivated sellers again, where prices can be more negotiable, there’s more inventory to select from, and some seller may even start covering closing costs again.

Interest rates going up will slow down the increase of housing values and some areas may see some depreciation because many sellers will be motivated to sell and take lower-than-appraised values. Real estate values are based on recent comparable sales, so a much-needed correction needs to take place.

For those individuals who would consider paying $50,000 over asking price, in this market, on average, you can buy down the rate on average of 25 basis points or 0.25% of the loan amount. This is done through mortgage points, the fees a borrower pays a mortgage lender in order to reduce the interest rate on the loan, sometimes also called “buying down the rate.” Each point the borrower buys costs 1 percent of the mortgage amount. So, one point on a $200,000 mortgage would cost $2,000

On a $300,000 purchase price it would cost you $12,000 to buy down the rate 1%, or 100 basis points, to lower the interest rate on a mortgage from 6% to 5%.

Why would someone undertake that strategy? It’s actually simple. Reducing the interest rate on your mortgage can reduce your monthly by approximately $188, and will take 63 months, or a little over five years, to recover the $12,000 investment. If you do not plan on staying in your house for the minimum of five years, then it would not make sense to buy down the rate.

Nonetheless, despite the increase in interest rates to cool down inflation and, with it, residential real estate sales, there will still be very competitive markets throughout the U.S. Sought-after cities like Dallas does not have enough inventory to meet demand.

The Scoop From Top Realtors

Here’s some advice from top realtors in hot real estate markets in the U.S.:

Jeannette Rowan, a Roberts Real Estate realtor for 18 years, says, “North Dallas area is one of the hottest markets in the United States. Some buyers are on hold, but the market is still sizzling hot in first-time home buyer markets.”

Ed Regan from Pat McKenna Realtors of Marlton, New Jersey, comments on how homes in South Jersey are selling since the Fed began raising rates in March: “South Jersey has more inventory than before. If priced correctly, homes are not selling in a day but still very quickly”

Kristoff Jones from Giving Tree Realty: “Properties are now staying on the market for an average of one week from the two- day average from before the [first] interest rate hike.”

Eunice Smith Clarke from Exp Real Estate, states that  “Tampa and Central Florida areas are very attractive seller markets with no end in sight, so you will need a top-notch realtor to be tenacious and on top of the local market conditions.”

In my local market in Houston, according to broker Eldridge Guillory from Quest Real Estate, “The Houston market leans to sellers, transplants and investors, which indicates aggressive market conditions”

The general consensus from this small sample is that while market conditions have improved somewhat for buyers, it is still a seller’s market in the most competitive areas.

However with the market slowly loosening up, this will bring less competition for each individual home on the market. Plus, with new home sales slowing, builders are starting to create incentives for buyers.

There may be some great buying opportunities, so interest rates increasing could possibly open up some buying opportunities.
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Mario Henry (www.housevisors.com), a former National Football League player, is a financial services professional with 18 years of experience in the industry and author of How to Hire Your House, an innovative guide on how to create a tax-free pension and sustain sufficient income through retirement. Mario also is a licensed insurance broker and a national motivational speaker. He was a wide receiver with the NFL’s New England Patriots and a scholarship football player at Rutgers University.