Should you wait until 2023 to buy a house?
Mortgage interest rates shot up in recent months. And buyers are well aware that inventory remains low while home prices continue to rise. In this environment, some prospective home buyers will inevitably decide to wait thing out and buy a house in 2023 instead.
That can be a smart strategy, depending on your financial situation and life goals. But there’s no guarantee the market will be easier next year. So while you’re waiting, take steps to improve your finances and better your odds at securing the home you want. Here’s what to do.
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Is it a bad idea to buy a house right now?
If you are not completely priced out of the housing market, now is still a good time to try to claim a home. Especially if you keep your expectations realistic.
“The market for homes is rapidly changing. Buyers can take advantage of the current inventory with less competition in the marketplace lately,” says Dustin Holmberg, vice president of lending for Clearview Federal Credit Union. “If yours is a market that favors buyers right now, you have more flexibility, allowing you time to look for the home you want while also lowering the possibility of a heated bidding war.”
He also points out that “you can lock in a rate now, purchase the home, and refinance in the future if and when rates go lower.”
“You will likely pay more next year for the same home, regardless of whether or not we are still in a bidding war market, which we probably won’t be.”–Ryan Bowman, Realtor, eXp Realty
Keep in mind that mortgage rates may only go higher in the coming months and years. That means it may be wise to lock in a rate now and claim a home sooner rather than risking even costlier financing in the future.
“You will likely pay more next year for the same home, regardless of whether or not we are still in a bidding war market, which we probably won’t be,” notes Ryan Bowman, a Realtor with eXp Realty in Ohio.
Also, kicking the can down the road until 2023 or beyond could lead to missing out on a home in your desired location or style. “There is a missed-opportunity cost that people sometimes forget to factor in,” adds Esther Phillips, senior vice president and director of sales for Key Mortgage Services.
Who should wait until 2023 to buy a house?
The housing market appears to be cooling off. But many believe it’s unlikely there will be a big turnaround in the next few months.
“Knowing this, you are likely better off postponing until 2023 to see what the market brings,” says Alex Capozzolo, co-founder of Brotherly Love Real Estate. “Use this time to pay down debts and build a bigger deposit to get the best possible house at the best rates a year from now.”
The decision to buy also depends on your current financial state and how higher mortgage rates have impacted your home buying budget.
If the combination of higher housing prices and increased rates has pushed your monthly payment beyond your affordability threshold, it’s a clear sign you should look to 2023 and beyond — or at least redirect your sights on homes that will fit your budget, Phillips adds.
“Buyers will have more options by 2023 in both housing selection and affordability. There will be less competition for the same property, allowing buyers to have more power in the purchasing process, thereby providing more security in their investment,” suggests Linda Falco, Realtor associate for Keller Williams in Florida.
“Cash buyers may also want to wait for prices to decrease. Even though increasing mortgage rates don’t affect them, they will have greater market options next year,” she adds.
6 steps to take now if you want to buy a house in 2023
If you’ve decided to delay your homebuying dream until 2023, there are action steps you can take now and in the coming months to strengthen your odds of winning a home next year. Here are six things you can start doing now to prepare to buy a home.
1. Talk to a loan officer — even if you're not ready to buy
“Talk to a reputable lending expert. So many buyers wait, thinking they know how much they would qualify for, but they don’t. So many look at their income and credit score and think that’s all it takes. But debt is just as if not more important than those factors. By discussing these issues with a trusted lender and understanding your financial position, you can have better footing as a buyer,” says Bowman.
“So many buyers wait, thinking they know how much they would qualify for, but they don’t... By discussing these issues with a trusted lender, you can have better footing as a buyer”–Ryan Bowman, Realtor, eXp Realty
Phillips agrees. “An experienced loan officer can review all aspects of your financial picture today and in the future and provide you with options you can execute upon,” she adds. “They can walk you through finding sources for a down payment, such as family member contributions, loans, or withdrawals from a 401(k) or retirement account, help you raise your credit score, and suggest ways to reduce your monthly qualifying debt.”
Falco advises meeting with a mortgage broker, a professional that can often find you the best price on a loan program. “A mortgage broker will help you understand the steps you need to qualify for a loan and determine the total amount of money you need to save to get into one,” she says.
Best of all, a consultation with a loan officer or mortgage broker will cost you nothing.
2. Set your sights on a loan program
Working closely with your loan officer, explore different mortgage loan programs you may be eligible for, including a conventional loan, FHA loan, USDA loan, or VA loan.
Each loan type has different requirements to qualify. For instance, conforming loans allow just 3% down payment while USDA and VA loans require no money down at all. And with an FHA loan, you can qualify with a FICO score as low as 580.
Knowing which loan program you’re using use will help you plan and save accordingly. So make sure you have a clear idea of what you’re working towards.
3. Start a savings plan
Remember: The more you save for a down payment, the more flexibility your lender has to work with you on other parts of the process.
“The earlier you start saving for your down payment, and the more you salt away, the better off you’ll be in the process,” says Holmberg.
Ideally, you want to save at least 20% to avoid paying costly private mortgage insurance (PMI) and qualify for the best loan offers. However, some loan programs, like an FHA loan, can get you financing for as little as 3.5% down. If you qualify for a VA or USDA loan, no down payment is required.
4. Pay down existing debts
If you have extra cash flow and can afford it, paying down balances on credit cards, student loans, auto loans, and other debt obligations is a good idea. Focus on paying down the debts with the highest interest rate first if you can.
“Even small amounts of debt can do a lot of harm to your debt-to-income ratio. It may sound counterintuitive, but paying down your lowest balance loans first can be a good way to help free up additional cash flow and improve that ratio,” advises Holmberg. “Make sure to check with your lender first, however, because sometimes having extra cash for closing is an even better plan.”
Paying off debts and reducing credit card balances can also help improve your credit score, which may open up new loan options and earn you a lower mortgage interest rate.
5. Understand credit score requirements
Every loan program has its own minimum credit score requirements. Consult with your loan officer on your current score and how much you need to improve it to qualify for a particular loan program. Following are the typical minimum credit score requirements for popular loan programs:
- FHA loans: 580
- Conventional loans: 620
- VA loans: 580-620
- USDA loans: 640
6. Take steps to improve your credit
You can often qualify for a better loan or lower your interest rate by improving your credit score. Even small improvements can help your mortgage application. Take these steps:
- Review your three free credit reports and work to amend any errors or inaccuracies you notice
- Pay your bills on time every month, in full if possible but at least pay the minimum balance due
- Strive for a lower credit utilization ratio. That means keeping your collective outstanding balances to 30% or less of your total credit limit
- Don’t close any old/existing credit accounts, and avoid applying for any new credit
Importantly, if you’re planning to buy a house, try not to open any new credit accounts or take on additional loans (like a car loan). New payments will increase your debt load and decrease the amount of house you can qualify for. Not to mention, opening new lines of credit can hurt your FICO score.
What will the housing market look like in 2023?
No one has a crystal ball to predict where the real estate market will be next year. But industry experts can give us some idea of what direction things may be headed.
Rates could level off
“I expect rates to level off over the remainder of 2022. There could be rate spikes or short-term increases over the near term. But I anticipate 30-year fixed interest rates will finish the year at or below 5.00% for well-qualified borrowers with conventional financing,” says Holmberg. “The supply shortage will keep prices relatively stable over 2023, returning to a more modest appreciation rate in the near term.”
On the other hand, Bowman foresees 2023 rates in the mid-7% range, with home prices appreciating about 5 percent. “We will also have a higher but not abnormal level of foreclosures next year,” he predicts.
Bidding wars could moderate
Capozzolo anticipates home prices likely decreasing by next year, although he’s not sure we’ll observe a shrinking or growth in buyer demand. “But I’m pretty sure the days of getting 30 offers in a week for 30% above market value are over,” he says.
We could see more inventory
Ask Falco and she’ll tell you that inventory levels in 2023 will most likely be on the upswing, both in resale and new builds.
“Manufacturing post-coronavirus is increasing, making more building materials available and causing their prices to drop. This will allow for more building to occur and a slight reduction in new home prices,” adds Falco. “As more new homes are built, there will be less competition for resale homes, which will help maintain affordable levels in the resale market. And concerning rates, if we continue to head toward a recession, mortgage rates will likely continue to increase next year.”
Your next steps
Whether you decide to strike now or take a housing hiatus until next year, don’t lose sight of the fact that you are in charge. Taking even small steps now to improve your finances and set a budget could make all the difference in your home buying plans.
There is no shame in waiting things out. But be proactive by doing what’s necessary now to fast-track your home purchase in 2023.