Should I Buy A House When Interest Rates Are High?

When considering buying a home, smart borrowers will often wait until interest rates come down. But what they don't consider is how interest rates impact the other variables, just as house prices, down payments, and consumer behavior, which can affect the total monthly payment a lot more than interest rates alone.

So I will discuss how interest rates affect consumer behavior, house prices, and down payments.

Consumer Behavior

Prices are determined by supply and demand.

High Demand + Low Supply = High Prices

Low Demand + High Supply = Low Prices

But it goes the other way too.

High prices can lower demand. And low prices can increase demand. Think of it like a discount or sale. Whenever your favorite product goes on sale, you often have to compete with other buyers to make sure you get it.

Interest is just the price you pay for a loan.

House Prices

When interest rates are low, demand for homes go up, driving home prices up. And when interest rates are high, demand for homes go down, driving home prices down.

The Down Payment

The down payment is a percentage of the home's price. Whether you're putting down 3% or 20%, the actual amount of dollars you put down depends on the home's price. So 10% down on a $2M home is the same amount of money out of pocket than 20% on $1M home.

$2M X 10% = $200k

$1M X 20% = $200k

But if you bought that house when it cost a million, even with a higher interest rate, both your loan amount and your monthly payments would be lower on the $1M home than it would be on the $2M home.

$1M House Price - 20% Down = $800k Loan @ 8% interest < $2M House Price - 10% Down = $1.8M Loan @ 2% interest.

Inflation

It's obvious that $2M dollar houses did not fall to $1M despite interest rates having tripled since 2020 and 2021.

In some areas, house prices have continued to go up.

And that's because of inflation.

Think of inflation like a pizza. Just because you cut the pizza into more slices, doesn't mean there's actually more pizza. It just means you're gonna have to eat more slices to satisfy your hunger.

Likewise, houses didn't necessarily get more valuable, the same way a pound of apples didn't get more valuable, but in both cases, it takes more dollars to buy both.

And in a perfect vacuum where inflation didn't exist to push prices higher, we'd see home prices coming down. But we don't live in a perfect world and the best the Fed can do is limit how fast inflation occurs, not whether it occurs, but just how fast it occurs.

This means that while house prices have already fallen from previous highs, they are unlikely to fall to previous lows. The pricing floor has been raised thanks to inflation.

You just have to ask yourself: a year from now, are home prices likely to be higher than they are now, the same, or lower?

None of us can be certain, but we can probably guess they'll be higher.

What This Means For You

With interest rates higher and the Fed not stating when they plan on dropping rates, you have the opportunity to buy a home at a price that will not be matched in the near future. That means your down payment will be lower today than if Feds drastically cut rates tomorrow.

You can also refinance your home after interest rates fall, allowing you to benefit from lower interest rates, smaller down payments, and increased home valuations.

Finally, if interest rates are the determining factor in your decision to buy, consider an adjustable rate mortgage or ARM. A 10/6 ARM allows you to lock in low interest rates for 10 years before rates start adjusting. If interest rates fall before those 10 years are up, you can do a rate and term refinance to keep the same monthly payment in order to pay off the mortgage sooner or keep the same term but with a lower monthly payment for the remaining 20 years.

Either way, the benefit of buying a house now when interest rates are high is a lower down payment in absolute dollars than you will be able to buy the same house for in the future within a lower interest rate environment.