Rates are still increasing — Is this a good time to buy a house?

Oct 27, 2024

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Even though the Federal Reserve has begun cutting short-term interest rates, mortgage rates have stubbornly remained above 6%. With a majority (84%) of rates on existing mortgages below 6% — and more than half below 4% — there is little incentive for existing homeowners to move.

No doubt, there is a massive, bridled demand of anxious homebuyers waiting to make a move. When considering rates, home inventory, and the rising costs of houses — is it a good time to buy a house?

In this article:

Understanding the current housing market

Is it a good time to buy a house?

Your next move

FAQs

Read more: Is it a buyer's market or seller's market? How to tell the difference.

One of the first considerations for would-be home buyers is likely to be mortgage rates.

According to Freddie Mac, rates bottomed near the end of September, sagging to a fraction above 6%. They've bounced higher since then, edging above 6.5%.

Obviously, we are not in the glory days of sub-3% home loan rates. However, mortgage rates are still below their 52-year historical average. Based on data collected by Freddie Mac, the 30-year mortgage rate has averaged 7.72% since April 1971.

If it makes you feel any better, the highest mortgage rate on record was 18.63% in October 1981. However, with the Fed beginning a cycle of lower interest rates, there is a hint of optimism in the air.

Take action: Use a mortgage calculator to determine the monthly payment you can afford. You can then find the home price, down payment, credit score, type of home loan, and mortgage interest rate to get you to your home-buying goal.

Read more: How to get the lowest mortgage rates

Existing home sales have plateaued over the past year while new home sales are rebounding. It is most definitely a real estate market of mixed signals.

Realtor.com's latest market analysis shows that homes on the market grew nearly 34% in September compared to last year — with for-sale inventory at its highest level since April 2020.

Listings were up nearly 12% in September compared to last year.

Take action: Consider expanding your search to more affordable areas close to your favorite neighborhood if it's too pricey.

New home sales in September were over 6% higher than a year ago. But new homes are not inexpensive. The median sales price of new homes sold last month was just over $426,000.

Take action: If you want to buy a house now, consider new construction. You may be able to choose some finishes or make an even better deal on a spec home that's been on the market for a while.

Read more: When will the housing market crash again?

House prices are still rising and were up 4.5% year over year as of July, according to the Freddie Mac House Price Index.

"We expect home sales to remain flat in the remainder of 2024 but pick up slightly in 2025 as rates decline further and more housing inventory comes on the market. However, we expect home prices to grow as the supply-demand imbalance remains a core issue in the housing market," a Freddie Mac analysis said.

Take action: Look for homes with price reductions where you want to live. Some apps, like Realtor.com and Trulia, will trigger an alert for sales price adjustments on homes you're interested in. Then, negotiate even harder.

Learn more: When will housing prices drop?

To answer the question of whether it's a good time to buy a house for you personally, you must look beyond broad market forces. Buying a home is more than considering macroeconomic factors. It's an important life decision based on your personal and financial situation.

Read more: Should you buy a house?

When you rent, the decision to move is broken down into six months, or a year or two at a time, as your lease renews. But every dollar-related detail makes a home purchase a medium- to long-term investment. Buying a house includes various costs: the down payment, closing costs, and financing fees, moving expenses, property taxes, and perhaps selling the house you're in now.

Homeownership requires a long timeline. How you make a living, your friends, family, and even community amenities all come into play.

A primary consideration: your job. Will it require a location change anytime soon, or can you live where you please? Is your income steady and all but assured?

Read more: How much house can I afford?

One of the significant factors that will qualify you for a home loan is your credit score. It's important to know it before applying for a mortgage.

For the most common loan, a conventional mortgage not backed by a government agency, you generally need a FICO score of 620 or better.

FHA loans can allow a credit score as low as 580 with 3.5% down. VA loans issued to qualified military service members and veterans don't officially have a minimum credit score, though some lenders will require a FICO score of 620.

Of course, minimum scores are the entry-level to qualifying; the higher your score, the better the loan terms you'll be offered. Most importantly, that can mean you'll pay a lower annual percentage rate over the life of the loan. You may also have more room to negotiate on fees.

As a benchmark to where you stand, the median credit score on a new mortgage in the second quarter of 2024 was 772, according to the New York Federal Reserve.

Read more: The credit score needed to buy a house in 2024

A primary financial metric lenders will use to determine your creditworthiness is your debt-to-income ratio.

Fannie Mae, a government-sponsored entity that provides liquidity to the home loan market, looks for a maximum total DTI ratio of 36% of "the borrower’s stable monthly income." Exceptions can allow for total DTIs up to 50%, but it's usually best to avoid working on the edges of qualification if you can.

You can calculate your DTI by dividing your total recurring monthly debt by your gross (before taxes and other deductions) monthly income.

Include debt such as monthly mortgage payments (or rent), real estate taxes, and homeowner's insurance. Also, add any car payments, student loans, and the monthly minimum due on credit cards. Remember any personal loan payments and child support or alimony.

Do not include debt such as monthly utilities — like electricity, water, garbage, or gas bills — or car insurance, television streaming subscriptions, or cell phone bills. You can also exclude health insurance costs and miscellaneous expenses such as groceries or entertainment.

Having a cash cushion in the form of emergency savings shows lenders that you are prepared for the unexpected. Of course, that savings account should also include …

A large chunk of your savings account should be dedicated to the down payment. A minimum of 3% down is required in order to qualify for a conventional loan targeted to first-time home buyers — or ideally, 20% to avoid private mortgage insurance. Yes, zero-down options exist if you are eligible for a VA- or USDA-backed loan.

According to Realtor.com, the median down payment in the third quarter of 2024 was 14.5% — about $30,300.

Buy smart and shop a lot. Relentlessly shop interest rates and mortgage lenders for the best loan offers and justified fees. Get a written preapproval from your lender, then shop for a house you can love and can afford. Your home buying competition is.

According to Zillow, when it comes to first-time buyers versus repeat buyers, first-timers are more likely to reach out to at least three lenders and three real estate agents.

Mortgage rates tend to fall during economic downturns, so a recession would definitely qualify as a time when rates would likely drop. However, lower rates generally increase demand as more buyers enter the market, so house prices would likely rise. Buying a house at a time when both mortgage rates and home prices are favorable is a challenge. You probably shouldn’t try to time the housing market by waiting for a recession. Buy when it makes sense for you personally.

"Buy now" advocates might say that if you find the right house at the right price — and you're financially set — you should purchase the home now and look to refinance later. But what if mortgage rates don't drop substantially enough to justify a refinance in a few years? Only buy a house when you are comfortable with the terms you can get on closing day.

Locking in a mortgage rate is a short-term decision, generally lasting only 30 to 60 days — sometimes up to six months. There's little reason to agonize over it. Be comfortable with the rate on your Loan Estimate and start packing boxes.

Homes become more affordable as your income and savings grow. Ask any homeowner: Buying that first house was a stretch. The monthly payment loomed large. As months and years go by, it becomes less of an issue. Then, as home prices continue to rise, you're on the right side of the equation: The growing equity builds your net worth.

This article was edited by Laura Grace Tarpley.

The best mortgage refinance companies charge low interest rates and fees, and they often have unique perks for customers. Find your best refinance lender.

The best USDA loan lenders accept low credit scores, are transparent about rates, and offer plenty of resources. Find the best USDA lender for your situation.

The best mortgage lenders for bad credit offer FHA loans, accept alternative credit data, and have strong customer service. Find your best mortgage lender.

VA loans a great for military personnel, and the top-rated VA loan lenders offer low fees and interest rates. Find the best VA loan lender for your family.

The best FHA lenders offer FHA loans with low interest rates, accept non-traditional credit, or provide educational resources. Find your FHA mortgage lender.