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Unlocking the Real Estate Riddle: Interest Rates, Home Prices, and Your Perfect Purchase Time

image of a house with mortgage rates

Are we ever going to see a drop in these interest rates? It's a question that echoes daily, and understandably so. It feels like just yesterday when we were enjoying 30-Year Fixed Rates at 3% or even lower. However, it's crucial for potential buyers and sellers to recognize that today's rates, although higher, still remain historically low. Just two decades ago, in the year 2000, rates were at a staggering 8.5% (source: FRED Economic Data).

So, the question arises: Should we proceed with buying or selling despite the current interest rates?

Let's break it down by examining what different mortgage interest rates mean for your finances.

Consider a $500,000 home with 5% down.

At a 7% interest rate, the monthly principal and interest payment would be $3,160.

Contrast that with a 4.5% interest rate, resulting in a monthly payment of $2,407—a difference of roughly $750 per month.

Interest rates and home prices are engaged in a dance. While discussions about interest rates are commonplace, the current state of home prices often takes a back seat. In Naples, we've observed a decrease in prices in some cases as the market has settled back down from the previous several years. For instance, the median price of single-family homes in November 2022 was $802,000, and a year later, it was coming in at $705,000—a 12% decrease (source: NABOR).

This decline is intertwined with the inverse relationship between price and mortgage interest rates. As rates climb, prices tend to fall. "When interest rates are going up, the cost of owning a home becomes more expensive due to the higher interest rate, which reduces demand. This reduction in demand then results in a drop in home prices." —

So, what takes precedence—price or interest rate?

While the difference in monthly payments at varying interest rates might not have immediately sent you to in search of a home, the truth is that the price of the home can hold more weight on your wallet than the interest rate you secure. And keep in mind that when interest rates start to drop, competition for homes could increase and cause the seller to gain an upper hand in pricing advantage.

Locking in the home you want today may be at a higher rate but may also be at a price advantage and you can always refinance your interest rate down the road if/when interest rates come down and secure a new mortgage. Some lenders are even offering programs to reduce refinancing costs to insent mortgages under todays rates.

So, should you buy now? Every situation and individual circumstances are different. You need to find the right scenario for you. Just know that there are pluses, minuses and trade-offs in all scenarios. Talk to a qualified lender (I am happy to recommend some if you need), carefully assess the options and make a decision that is best suited for you.


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