With mortgage rates climbing, a housing market reset has arrived. But that doesn’t mean you need to wait to buy a house if you value that life change

Welcome to Financially Well, the finance podcast for Millennials. In this episode, I want to discuss whether you should wait to buy a house now that mortgage rates have risen. If you already have an affordable rent or low mortgage rate, would buying a new house now be a financial mistake? To be sure, we all need a housing market reset. We need to think of the U.S. economy and housing market in new terms. And we need to replace, on an indefinite basis, what we previously assumed to be true about how housing decisions fit into our financial lives.

The Need For a Housing Market Reset

Most Millennials must wait to buy a house while they save up enough for a down payment. And that process can feel painfully slow. Especially when unexpected life events place a competing demand on their cash flow.

But then a point arrives at which they feel ready to imagine themselves as actual homeowners. Even then, though, the homebuying process can seem to move at a snail’s pace. Housing decisions have such an impact on both our finances and our life that a deliberative, thoughtful approach is critical for a successful outcome. And even once you feel ready to put in an offer, you still need to get lender approval. And you still need to compete against other bidders, often amid very low housing supply.

For all of these reasons, I’ve met many Millennials who began preparing to buy a house more than a year ago. But a year ago, mortgage rates looked quite different than they do today. This new reality has significantly altered the research and assumptions on which potential homebuyers have relied. So what now? Should you wait to buy a house? And is waiting the only prudent option if you already have an affordable rent or low mortgage rate?

Would You Wait to Buy a House in These Circumstances?

On May 27, Emily Badger wrote an article in the New York Times entitled, “When the Best Available Home Is the One You Already Have.” Most notably to me, she shared a brief anecdote about a couple in Washington, D.C. who recently confronted these exact questions:

“Joe Swiderski and his wife have lived in the same Washington row home since 2013. They would like more space for their two daughters, now 7 and 2. But they refinanced during the pandemic into a 20-year loan that shaved three years off their mortgage and cut their interest rate to 2.5 percent. That has made what should be a fairly simple decision — a growing family needs a bigger house — much more complicated, Mr. Swiderski said.”

She quoted Joe as wondering, “What are you going to weigh more? A bigger yard, or a higher interest rate? The lack of storage, or the soaring price of housing? What’s finally going to be the tipping point? We don’t necessarily know.”

Why a Housing Market Reset May Help Homebuyers

For a moment, hold off on concluding whether you would wait to buy a house in Joe’s situation. First, we need to accept, if not exactly, embrace the economic changes that have taken place in recent months. Unfortunately – at least as borrowing costs are concerned – we all now need a housing market reset. The mortgage rates on which we’ve based previous homeownership calculations no longer apply. The mortgage rates that our friends or family may have no longer apply. We need to reset our perspective. And we need to think about our housing options on these new terms.

Jerome Powell, the chair of the Federal Reserve, said as much on June 15 noting, “I’d say if you are a homebuyer …or a young person looking to buy a home, you need a bit of a reset. We need to get back to a place where supply and demand are back together and where inflation is down low again, and mortgage rates are low again.”

Journalist Lance Lambert explained in an article for Fortune that “It’s clear that Powell hopes the housing cooldown caused by rising mortgage rates will help to push inventory levels up. Powell suggests it’ll help buyers, the thinking being: When shoppers restart their house hunt, they’ll be met with a friendlier market. Higher inventory levels would give buyers more time to decide, and reduce the chance they’ll have to engage in a bidding war.”

The Math May Dictate That You Wait to Buy a House, But Is That Enough?

Lambert’s analysis offers a reason for hope, despite the disappointing mortgage rate trend. You’ll need to revise and continue to update your financial calculations related to housing. Perhaps you’ll ultimately benefit in other ways, such as slower home price growth or less competition in the housing market.

But let’s revisit Joe Swiderski’s musings about his own family’s decision. How influential will mortgage rate increases prove to be in the minds of potential homebuyers? The increased costs have the potential to overtake other factors and considerations, some of which actually may be more important.

In the Times, Emily Badger introduced her article by writing, “In this housing market, it makes less and less sense to move. American homeowners sitting on the lowest mortgage rates in modern history will find it far costlier to buy their next home. Renters facing steep inflation may be better off renewing a lease than hunting for a new one. …The simplest and most affordable decision for many Americans will be to stay put — even if their homes become too small, too big, too crowded, too far from work, too isolated from family, or too much to maintain.”

The Risk When You Wait to Buy a House for the Wrong Reasons

I certainly don’t dispute the math that underpins Badger’s conclusions. Even so, the math poses a risk to some Millennial families. I encourage my clients to think of housing as a form of consumption, rather than an investment. In other words, within reason, make housing decisions that support and improve your life. If a particular housing decision reduces your costs or increases your wealth, that’s wonderful. But that’s not necessarily the ultimate goal.

If you need more space for your growing family, I don’t want you to look at your low mortgage rate and conclude, “We shouldn’t move.” Sure, you may need to save money over a longer period of time to afford your increased housing costs. And, yes, you may pay more in interest over time. But that’s simply a personal choice about how you use your money. If you put a high value on providing your children with more space to play, then that’s a perfectly fine use of your money.

How Does a New House Fit In Your Life?

Like any other purchase, you don’t want your housing decisions to threaten your financial stability. But if your finances can support higher mortgage rates, then you don’t need to wait to buy a house. A housing market reset reminds us that the financial details have changed. But that doesn’t mean that the ways in which you want to use your money also needs to change.

If you think you may find yourself in this situation soon, check out both Emily Badger’s article and Lance Lambert’s reporting on the Federal Reserve. And I’d love for you to subscribe to this finance podcast for Millennials to learn more about housing, inflation, and interest rates as we continue to monitor them in the months ahead.

[Editor’s note: this article reflects the transcript (which I’ve edited for clarity) of a recent Financially Well podcast episode.]

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About Kevin Mahoney, CFP®

Kevin Mahoney, CFP® is the founder & CEO of Illumint, an independent firm in Washington, DC that offers financial planning for Millennial parents. He specializes in navigating the new financial decisions that arise during our 30s and early 40s, such as repaying student loans, buying a house, saving for college, & investing for the future. In addition, Kevin also leads a financial wellness benefits program for Millennial employees around the country, including group speaking engagements.