Will mortgage rates go down? / Should I wait to buy a home or investment property?

[Alex Fenske]

It's a popular question people are asking me these days. Here are my answers...

Will rates at some point be lower than they are today? Yes. What most people really mean when they ask me this question, though, is whether rates will go back down into the 4s and 3s. That answer is no.

Several times in the past 12 months, rates have swung up or down a full point in the span of just 30 days. In an industry where the typical transaction takes 41 days to complete, you can see how "timing the market" is typically a losing battle.

If you're day trading stocks that's one thing, but you're talking about a long-term investment acquisition. Better to lock in an investment purchase with a strong cap rate when you can, knowing that you can reduce financing costs in the future and will begin reaping the benefits of owning the investment property now as opposed to some undetermined time in the future.

As for waiting for prices to fall, you might be waiting a long time. Values in the Chicagoland metro area have flattened out on a 12-month average due to the last 4 months being down a hair (1-2%) compared to the same months the year prior. But at the same time there is an all-time record low number of homes available in this marketplace and it would take quite a bit more dropoff in demand to allow prices to fall by any noticeable amount. And the opposite is what's actually happening - the spring seasonal buyer bump is pushing us back into multiple offer, above-asking scenarios as the norm.

Buy a property that makes enough sense today to get into it, and know that you will benefit from near-term appreciation due to low inventory and can refinance sometime in the future at a nominal cost to improve net cash flow. It does help to talk to your lender about temporary (2-1 and 3-2-1) and permanent rate buydowns, evaluate other possibilities such as the 5/1 ARM, and keep an eye out for other creative financing options to make the most of the current environment. But don't try to time the mortgage market like you would time a day-trade; it just doesn't work out well.

[Eric Fernwood]

The Fed is committed to continually increasing interest rates until inflation is at an “acceptable” level. And, I don't see inflation hitting that level any time soon in the foreseeable future. So, interest rates will rise.

What is the impact of rising interest rates on debt service? The table below shows the debt service for a $400,000 property at different interest rates. Increasing interest rates will result in higher monthly costs and lower rates of return.

With inventories falling in many locations, I expect prices to increase. The table below shows how different appreciation rates will impact acquisition cost and debt service, assuming a 6.5% interest rate.

So, if interest rates rise or prices increase(or both), you will end up paying more in the future than today. 

Another important consideration is the hold period.

Most of our clients intend to hold onto their real estate indefinitely, so what happens in any given month or year is not relevant. One client I spoke with put it well: “Higher interest rates are reducing cash flow by about $300 per month. I believe interest rates will be lower in one or two years, and I will refinance when they are. Assuming two years, that means I will pay $3600 ($300 per month times 2 years) more for the property due to the high interest rate. On a $400,000 property, $3600 is not significant.”

The lowest-cost approach is to buy now, lock in the price, and refinance in the future when rates are lower.