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Understanding the Housing Market

Understanding the Housing Market and Making Informed Decisions as a Physician

Real estate remains one of the most effective ways to build wealth. It is a tangible investment avenue, and its potential for consistent appreciation and income generation makes it an excellent wealth-building tool for physicians.

With home prices and mortgage rates rapidly rising, physicians like yourself, who work hard and invest heavily in their education, might find it challenging to enter or re-enter the housing market. In the face of market volatility, you want to be sure that you are not saddled with a mortgage payment you cannot afford or investing in an asset that will lose value in the future.

These fears are understandable, but being paralyzed by indecision can result in you missing out on opportunities to save money in the short term and build wealth in the long term.

Whether you're relocating for a new job or seeking to upgrade your residence, you deserve to feel confident in your decision to purchase a home. To do that, it’s important to understand how the housing market got where it is today and what factors will continue to influence home prices and interest rates in the future.

History Tells a Story

Historically, waiting for home prices and interest rates to drop simultaneously might seem like a logical choice, especially after witnessing the falls in 2007 and 2020. However, these scenarios are extremely rare. The occurrences in 2007-2009 and 2022 were exceptions rather than the norm.

Despite occasional fluctuations, home prices have generally risen consistently regardless of mortgage rates. The data below from the Federal Reserve Bank of St. Louis illustrates the relationship between 30-year fixed mortgage rates and the S&P/Case-Shiller National Home Price Index (an economic indicator that measures the change in value of U.S. single-family homes monthly).

While home prices have steadily increased since 2012 due to low supply of homes and high demand, interest rates respond to what is happening in the economy.

Mortgage rates will fall when the bond market becomes confident that there is meaningful progress on slowing down inflation. This could happen with an announcement from the Federal Reserve about when they will cease hiking rates, or through economic data that shows the economy is slowing down.

Eventually, monetary policy and tightening of the money supply will push the United States into a recession. Mortgage rates typically increase leading up to a recession, which is what we’re seeing today. But to come out of a recession, interest rates are lowered to stimulate the economy moving forward.

You can see this in the image comparing mortgage rates and home prices. Historically, mortgage rates always fall during and immediately after a recession.

The Costs of Waiting

I can be tempting to wait until mortgage rates come down to start your homebuying journey. However, hesitating can carry hidden costs:

  1. The home you want will be more expensive

Prices might seem relatively high now, but it’s important to remember that homes historically retain and increase their value over time. While prices do fluctuate in certain markets, because of the supply and demand imbalance, there will not be any significant and sustained home price declines.

  1. Your rent will be higher

According to ipropertymangement.com, average rent prices have increased 8.85% per year since 1980. While the cost of buying a home remains high, more people are going to remain in the rental market which will keep rent prices elevated. Rent prices are also affected by inflation, whereas as a mortgage payment is not.

  1. You will miss out on home equity

Homeownership helps you build wealth by providing you with equity in your home—the portion of your home that you actually own outright. As you make mortgage payments and your loan balance decreases, your equity will increase. If you wait until the right time to buy and continue renting, you are paying money every month that you will never see again.

  1. You could lose the ability to negotiate

When competition for homes is low, you have more opportunity to negotiate with sellers on price reductions and credits for closing costs or interest rate buydowns. Once that “perfect” time to buy a home comes around, there are going to be a lot more offers on the home you want. That means the seller dictates the terms, not you.

  1. Interest rates could increase even more

Is it impossible to predict exactly what will happen with interest rates. While we can get a good idea based upon inflation numbers and what the Federal Reserve is going to do with their monetary policy, there are many factors at play that affect interest rates like inflation, economic growth, and monetary policy.

Home Equity Can Give You Options

If you’re like many physicians who have been in the same home for several years, you are probably ready to upgrade your living space. You might have purchased a home quickly during the market boom of 2020 and 2021 and would like to move to a better location for your family, but you are hesitant to give up your low mortgage rate.

Numerous homeowners express regrets about their purchases during market booms, especially if they compromised on home features to secure a lower rate. For physicians, this might mean settling for homes further from work, less suited to family needs, or not optimized for a home office or study space.

The silver lining? Most homeowners are thrilled with the equity they've built. For instance, U.S. homeowners saw an increase of $1 trillion in equity in 2022 alone.

If you have a lot of home equity, you can move to a home that better suits your needs without drastically increasing your monthly liabilities. You can either use that equity as a large down payment to reduce the principal balance on your new mortgage, or you could use it to pay down high interest debts you may have accumulated over the last few years. This could reduce your total monthly expenses and make a new mortgage at a higher interest rate more manageable.

Final Thoughts

Physicians have unique financial and personal needs. While low mortgage rates are attractive, considering your overall financial well-being, aspirations, and long-term goals can lead to better housing decisions.

The earlier you start, the quicker you'll be on the path to building equity, potentially offsetting student debts, and achieving financial freedom in your personal and professional life.

For tailored advice specific to your situation, consider consulting with a mortgage advisor at NEO Home Loans. They specialize in assisting physicians. They can provide a comprehensive cost analysis to guide you in this significant decision.


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