Is now the right time to buy a home?

Finally, the news many Coloradans have been waiting for: House prices actually went down last month.

The recent sharp uptick in mortgage rates, coupled with rising inflation and the ever-present specter of recession, seems to have effectively pumped the brakes on some of the wilder excesses of the housing market. (You may have noticed fewer news stories about buyers offering a free Caribbean vacation or promising to name their imminent babies after sellers.)

This slowdown has also meant there are finally more places to buy. In the past couple of months, the number of available homes in Denver has more than tripled, Denverite reported, and properties are taking almost twice as long to sell (up from 10 days to 18).

“It was definitely the right move for the Federal Reserve to raise interest rates, and they arguably should have raised them earlier,” said Alex Fayman, Ph.D., chair and assistant professor in the Department of Finance at Metropolitan State University of Denver.

The cooling of the overheated property market is a good thing, Fayman said, and he would support further interest-rate hikes. “Aggressively raising the rates will siphon money out of the system,” he said, “and that will help control inflation before it takes hold, which is critical.”

Sudden surge

For most potential homebuyers, the past two years have been a white-knuckle rollercoaster ride. It started with the pandemic, when thousands of home-working people — sandwiched between their spouses, children and pets on cramped sofas or at their kitchen tables — reflected that maybe it was time to find a bigger place.

But the sudden surge in demand for homes was met by an equally drastic decline in available supply (house listings dropped by 45% in 2020) plus a grinding halt to the construction industry. Unsurprisingly, house prices shot up. And once the Federal Reserve, wary of another recession, lowered interest rates and made it cheaper to borrow money, demand rose further.

“Buying real estate will always be a good long-term decision,” Fayman said. “And despite rising prices during the pandemic, plenty of people seemed to recognize that the opportunity to lock in with such a low interest rate was a real gift.”

As competition for homes intensified, Colorado — and particularly Denver — was hit hard, not least because of the sheer number of people looking for a place to live. (Between 2010 and 2020, Denver’s population grew by almost 20%, with 115,000 new residents.) By the end of 2021, there were just 1,477 homes for sale in the whole of metro Denver, an area that holds roughly 3 million people.

Interest counts

Experts say they expect mortgage rates and home prices to stabilize this year, but nobody seems to be anticipating a dip in the market, Fayman said.

“Despite the high interest rates, the number of house-hunters and Colorado’s lack of home inventory compared to the rate of population growth should mean house prices remain steady and even grow a little this year,” Fayman said.

And for buyers being drawn in by the gradually shrinking sale prices on Zillow and Trulia, the professor has some advice: Don’t get too distracted by the sale price, because that’s not always what counts the most.

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“Obviously, it feels great to buy a house at a lower price,” said Fayman. “But I’ve done enough mortgage calculations in my classes to know that lower interest rates are what really count. They will always be more beneficial in the long run simply because their benefits last for years and even decades.”

The numbers bear this out. To give a concrete example: If two people each made fixed-rate monthly payments on a $500,000 house (assuming a 20% down payment) but one paid at 3% and the other 5%, the second person would pay around $500 extra per month. Over the lifetime of a mortgage, that really adds up.

Winning decision

Taking all these factors into consideration, suppose a millennial with a young family has a mortgage in place and enough funds to buy a first family home — should they buy now?

“If you’re a young family looking to settle down, and you can afford it, I’d absolutely go ahead and pull the trigger,” said Fayman. Although rates are higher now than last year, he explained, they will likely rise again soon, so it makes sense to lock in now at the current rate, if possible.

Besides, renting is generally undesirable. “Current rental rates, especially in Denver, are punishing and often cost more than a mortgage would,” he said. “Plus, a landlord can raise your rent at any time. Compare that with the security of being tied into a 15- or 30-year fixed-rate mortgage deal.”

Ultimately, you’ll simply get more for your money by buying. And so long as you have a long-term outlook, your property should be able to ride out any blips in the market and still be worth as much, or even more, a few years down the line.

“Houses are the No. 1 investment vehicle for most Americans,” Fayman said, “and there’s a good reason for that. They are solid, predictable and largely dependable.

“In the long run, buying a home will always be a winning decision.”