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As Mortgage Rates Rise, When Is the Right Time To Buy a Home?

Borrowing Cost Bump

When it comes to the cost of housing, everything is relative. The category falls under non discretionary spending: you need someplace to live. That’s not to say there’s no choice involved, however. Whether to rent or buy is an age-old, all-important question.

During this year’s second quarter, the median monthly mortgage payment was nearly one-and-a-half times higher than the median asking rent for the same time period. According to the MBA, that’s the largest such split since 2009.

The biggest reason borrowers are spending more is higher interest rates. The average rate on a 30-year fixed mortgage checked in at 5.66% last week, which is nearly double where it was at this time in 2021.

Assessing Affordability

Home prices have risen since the start of the pandemic. Inflation is also putting pressure on Americans’ spending habits, and potentially forcing some would-be homebuyers to continue renting. According to Redfin (RDFN), 16% of buyers that were in contract to buy a home in June eventually backed out.

There are some signs that increasing mortgage costs and the resulting fall in demand is making an impact on home prices. Existing home sales have been on the decline for months, and in June the growth of prices slowed.

Industry analysts say many people are in a good position to buy due to savings built up throughout the pandemic, as well as raises paid out by employers. That said, higher mortgage costs may reduce the overall budget.

Deciding To Rent or Buy

When deciding whether it’s the right time to buy a home, some advisors suggest looking at the ratio between the nation’s median asking rent and median monthly mortgage payment. Roughly speaking, asking rents are around 30% lower than monthly mortgage payments at present.

Some investors also look at a property’s asking rent to make sense of price. The rule of thumb is “don’t pay more than 100x” monthly rent. So, if a house could be rented for $1,000 per month, its fair market price is $100,000. Just because you have the money doesn’t mean you should spend it. Renting is sometimes the smarter option, but you need to crunch the numbers and analyze all the monthly expenses.

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James Flippin ABOUT James Flippin James Flippin is the son of a financial advisor who grew up hearing and learning about bond yields, interest rates, the stock market, and the ins and outs of Wall Street. After stints as a licensing and business broker for Marcus and Millichap in New York City, James moved into broadcasting and became a reporter and anchor. He covered crime, politics, finance, and tech at NBC News Radio while working part-time as a producer for SiriusXM. James graduated from the University of Delaware with a bachelor’s degree in political science and economics. He's also an accomplished podcaster with over 10-years of experience.

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