Waiting for Rates to Drop Could Be a Dumb Move
Waiting for rates to drop could
be a trap
The housing market is broken. Unfortunately, it’s still an essential part of growing lasting wealth for most Americans, so we’ve got to learn to play with broken toys.
A lot of people think that waiting for rates and housing prices to drop is the right move. They think that, given time, things will go back to where they were and they can get back on track to building their future.
This is a bad call, in my opinion. The fact is that we aren’t going back, at least not any time in the next decade. That’s 10+ years of pushing pause on building a family, stockpiling equity, investing in your community, etc.
Rates will come down, we just don’t when or how much. Housing prices on the other hand, the hard facts just do not paint a good picture. It’s a simple supply and demand issue.
Rates, while important, just don’t come anywhere to addressing the core problem we’re facing. Waiting on them to drop is like waiting for the price of water to come down before putting out your house-fire.
Why You Shouldn’t Wait for Rates to Come Down to Buy a Home
If you’ve been dreaming of homeownership but hesitating to jump in because rates seem too high, you’re not alone. It’s a common concern, and on the surface, it makes sense. Why pay more if there’s a chance rates might drop? But here’s the thing: waiting for rates to come down could cost you more in the long run — both financially and emotionally. Let’s dig into why now might be the perfect time to buy, despite interest rates being where they’re at.
Understanding the Core Issue
We have a major problem with housing affordability here in the U.S. That’s kind of a no-brainer for most folks, but I think it’s important to call out the issue as often as we have a chance to. The core of the problem isn’t mortgage rates. The issue is the prices of homes on the market.
America isn’t building new homes. The “starter home” is a nonexistent concept from a bygone era. The type of small home on a small lot that built the middle class in the post-depression eras just doesn’t make as much money for builders or investors, so they don’t waste their time on them. Until our government either forces developers to build starter homes (as a % quota of their total properties built) or incentivizes them to do so through subsidies, builders are going to focus on constructing mid-size tract housing that costs more and takes more time to build, which they can sell for more money and recognize a larger profit (The U.S. median home price is currently $420,000 - *I’m going to go on a tangent here before the next section of blog, so feel free to read my ranting if you want). I don’t know about you, but I won’t be holding my breath on our government doing anything to help solve the core problem.
Here’s some facts to paint a better picture: We only built 947,000 new single family homes in 2023 with a population of 330 million people. Compare that to the 1 million single family homes we built in 1988, back when our population was just 234 million. The math just doesn’t work out. We’ve got more people at the party but we didn’t buy another pie.
In the meantime, we’re all left out here as latchkey kids that have to fend for ourselves while Washington spends its time wrestling over who can deliver more for their donors. They’re not coming to save any of us.
So, what do you do if you’re wanting to enter the housing market, but you’re watching prices and rates hovering above the clouds? Wait it out? Here’s my argument for why that’s a bad idea:
* TANGENT - Okay, this shit really pisses me off. In 1988, the median US income was $27,000 per year and the median home price was $110,000. Median income was 24.5% of median home cost. In 2022, median US income was $37,585 and the median home price was $428,000. That’s an income that's just 6.4% of median home cost. In ‘88 the average mortgage payment was $1,000 and in 2022 it was $3,400. These data points indicate COUNTLESS systemic problems. You don’t even need to read the rest of the blog. If this doesn’t motivate you to buy a house now, I’m not sure any argument I put together can sway you.
1. Rising Rates Are Temporary, Home Prices Are Not
One of the most important things to remember is this: you can refinance a loan, but you can’t go back and buy a house at last year’s prices. Historically, home prices tend to rise over time. The longer you wait, the higher the likelihood that the home you want will become more expensive. Even a small increase in home prices can outweigh the savings from a slightly lower interest rate.
Here’s a quick example: if a $300,000 home appreciates at 5% annually (a conservative estimate), that home will cost $315,000 next year. Meanwhile, even if rates drop by 1%, your payment might not be significantly lower because you’re borrowing more money.
2. Homeownership Is Better Than Throwing Away Money on Rent
When you rent, 100% of your payment goes to your landlord. None of it builds equity, and none of it benefits you in the long run. Homeownership, on the other hand, allows you to build equity over time. Even in a high-rate environment, part of your payment goes toward reducing the principal balance of your loan. That’s money you’re essentially paying yourself.
If you’re already paying high rent, consider that the monthly difference between renting and buying might not be as big as you think — especially when you factor in the long-term benefits of homeownership.
3. The Cost of Waiting
Waiting for rates to drop can feel like a smart strategy, but it’s a gamble. Even if rates do drop, you may not actually save money. Here’s why:
Increased Competition: Lower rates mean more buyers entering the market, which can drive home prices higher and lead to bidding wars. This is exactly what drove our housing prices to where they are now. As rates tick down, which they likely will, more houses will sell and faster. This will create a situation with high demand and low supply, which = higher prices.
Lost Time Building Equity: Every month you wait is another month you’re not building equity in your own home. Equity you could use to remodel a home, send your kids to college, or even purchase another property to use as a rental.
Uncertain Timeline: Rates might not drop significantly for years. Meanwhile, you’re missing out on the stability and benefits of owning your own home.
4. Refinance When the Time Is Right
The beauty of buying now is that you’re locking in your home, not the rate. Interest rates are cyclical, and if they go down in the future, you’ll have the option to refinance to a lower rate. In the meantime, you’re already benefiting from homeownership: building equity, potentially taking advantage of tax benefits, and enjoying the stability of owning your own home.
5. Life Won’t Wait
If you’re putting your dreams on hold while you wait for the “perfect” rate, you may want to reevaluate your plan. Maybe you want to start a family, have more space, or stop dealing with a landlord. Whatever your reasons for wanting to buy, they probably go beyond the numbers. Owning a home is about creating a place that’s yours, building a foundation for your future, and investing in your own stability.
If you can afford to buy now, don’t let the fear of interest rates keep you from achieving your goals. Remember, a slightly higher monthly payment today could be worth the long-term benefits of owning a home and living the life you’ve been working toward.
Don’t Neglect Your DTI
If you are going to wait for rates to drop, PLEASE do yourself a favor while you’re waiting: make sure your DTI is dialed-in.
What is DTI? Debt-to-Income. It’s a ratio of how much money you bring in on a monthly basis vs. the debts you’re obligated to pay. For most borrowers/mortgages, you’ll need a DTI ratio of 50% or less. What this means is that your TOTAL monthly obligations cannot be more than half of what you earn in a month (before taxes).
Here’s an example: let’s say you make $10,000 a month between you and your spouse (or your sibling, or whoever you’re buying a home with). In order to hit your DTI threshold to be approved for a mortgage, ALL of your debts cannot total more than $5,000/month. This includes credit cards, child support, alimony, car payments, AND your housing payment (mortgage, interest, taxes, insurance, and HOA dues).
Again, if you are going to hold down the fort and wait for rates to drop, spend that time analyzing your income and debts. Do everything you can ahead of time to get your non-housing debts as low as possible. This will set you up to qualify for as much house as possible when the time comes, and you’ll probably make the loan qualification process smoother by paying attention to this before you’re ready to apply.
Rates Aren’t Everything - Don’t Let Them Hold You Back
Yes, interest rates matter. But they’re just one piece of the puzzle. The decision to buy a home should be based on your financial readiness and your goals, not on trying to time the market. By waiting, you’re taking a gamble that could cost you more than you think. If you’re ready to buy, take the leap. Rates may come and go, but the benefits of homeownership last a lifetime.
Let me know if you want to find out more. I’m always happy to chat!
