Mahoney Knows Homes: Buying a Payment?

First of all, I want to strongly caution anyone taking mortgage-rate predictions from a Realtor.

Personally, it’s not my area of expertise. I don’t have a deep enough understanding of the inner workings of the Fed, Fannie Mae, the bond market and decisions being made in Washington to tell someone when mortgage rates are going up or down.

Hint: Nobody really does.

Determining the right time to buy a home has always had more to do with your personal financial situation and long-term goals than trying to perfectly time an interest rate.

And while we’re here, if someone tells you to “marry the house and date the rate,” proceed with caution.

I know a lot of great Realtors. Smart Realtors. But I’ve never liked this kind of catchy assurance because there are no repercussions for the person saying it. They sell the house. You get the mortgage. Then you’re the one hoping rates eventually fall enough to refinance.

Your courtship with that interest rate could last longer than expected.

I’ve been thinking a lot lately about home prices, rising interest rates and why the housing market feels increasingly difficult.

And I keep coming back to one idea:

Many buyers aren’t really buying at a price. They’re buying at a payment.

The average 30-year mortgage rate climbed to over 7.5% at the beginning of October. That matters because when rates rise, the house itself doesn’t suddenly become less desirable. It becomes less attainable.

A buyer doesn’t experience a $500,000 house as an abstract $500,000 number. They experience the down payment, mortgage payment, property taxes, insurance and everything else that hits their bank account every month.

And Americans don’t exactly have unlimited cash lying around.

According to the Federal Reserve’s latest household survey, only 63% of American adults said they could cover a $400 emergency expense completely with cash or its equivalent.

That’s why I think monthly payment matters more to this housing market than we sometimes acknowledge.

Every time mortgage rates increase, the same house becomes more expensive without the seller changing the asking price by a single dollar.

And something else happens.

That house starts competing with what the same monthly payment can rent.

At a certain point, the value proposition scales tilt towards renting, as buyers have to consider the best value for their money, weighing risk of repairs, upkeep, market changes, etc. 

I’m not advocating for renting over buying. Homeownership has advantages that renting simply doesn’t, particularly when you plan to stay somewhere for a long time.

But buyers aren’t making decisions in a vacuum.

At some point, people look at their options and ask a very reasonable question:

What am I actually getting for my money?

And I think that question helps explain some of what we’re seeing in today’s housing market.

If asking prices remain high while the cost of borrowing continues climbing, there are only so many ways affordability improves.

Americans can earn substantially more money.

Buyers can accumulate substantially larger down payments.

Interest rates can decline.

Or home prices can adjust.

I’ve been thinking long and hard about which of those is most likely to happen first.

My suspicion is that in some parts of the market, prices will have to do the adjusting.

With mortgage rates climbing as we enter a time of year when the housing market typically slows anyway, this could make for a long winter for sellers who need to move but are struggling to find a buyer.

The sticker price will always matter.

But right now, it is worth considering what the monthly commitment “ceiling” for your home would be. At the end of the day, that is what buyers are looking at. 

The payment.