Will the housing market crash? How to decide if you should buy or wait

If you were planning to become a homeowner in 2022, there's a good chance that inflation, rising interest rates, higher home prices and recession fears gave you some second thoughts:

• Should I buy a house now?
• Can I even afford to buy when mortgage rates have more than doubled?
• Is the shortage ever going to end?

Valid concerns like these show you're thinking through the benefits and risks of buying a home and trying to make a financially sound decision about a purchase with many emotional components. After all, buying a house is a significant step in providing and caring for your loved ones. To help figure out what's best for you, here are some things to know about the current housing market and the personal finance factors you'll want to consider.

The average interest rate for a 30-year fixed-rate mortgage squeaked above 6% in September 2022 for the first time since 2008. One year earlier, rates were just 2.86%—nearly an all-time low.¹

If you'd bought a median-priced home when rates were at their lowest, you would have paid around $415,000. Let's say you were able to put 10% down and borrowed $373,500. Your monthly payment would've been about $1,391. But if you'd bought a median-priced home at the end of June 2022, you would've paid around $440,000. With 10% down and a 5.7% mortgage rate, your monthly payment for the same house would be over $900 more at about $2,299.²

Higher mortgage rates can also make people reluctant to list their homes for sale—85% of mortgaged homeowners have an interest rate below 5%, making them unlikely to want to move.³

Total costs can vary widely between mortgage lenders even if the rate is the same. It is important to talk to a mortgage loan officer to understand all of the fees and costs associated with a mortgage.

In 2022, the number of homes for sale hasn't been high enough to meet demand. Many parts of the U.S. are experiencing a housing shortage for reasons that go back to the Great Recession and have been compounded by the pandemic.

However, there is some good news about housing inventory: The supply of new homes spiked in 2022 and reached 10.9 months' worth in July, which represents the most recent data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.

As for the supply of existing homes, the supply-demand rate was just 1.6 months in January 2022. That means it was estimated to take just 1.6 months for all the homes listed at that time to sell. A balanced market has about 6 months of supply. In July 2022, it was 3.3 months, a pace that still favors rising prices.

July 2022 saw the largest year-over-year inventory increase in the history of Realtor.com's data: a 30.7% jump. Inventory in August 2022 was 26.6% higher than in August 2021. Buyers in many areas have more options now, especially in the West, but inventory is still lower than it was before the pandemic—back when interest rates were around 4%.

With these different factors at play, you might be wondering if the housing market will crash. When mortgage rates increase, homebuyers can't afford to borrow as much for a home. Home prices tend to go down as a result.

Home prices in June 2022 were 18% higher than they were in June 2021.⁴ Home prices also tend to dip in the fall and winter, but it's a tough call to make. After all, no one can predict the future or what will happen even just a few months down the line.

That's what's going on in the housing market as of fall of 2022. Waters are murky, but let's shift gears and talk about something you may be able to exert some control over when it comes to preparing to buy a house: your finances.

You'll want to know if your credit score in a good place to borrow money for a mortgage. You typically need a credit score of at least 620 to qualify for a conventional loan, but the lowest rates may go to borrowers with scores of 760 or higher.⁵

If your credit isn't in that range or is just shy of it, don't fret: There are several steps you can take to improve your credit and increase your chances of getting approved for a loan that works for your budget.

Have you saved enough for a down payment? This question can be tricky to answer because there are different ways to define "enough" when it comes to down payments.

Many people don't know that you can get a conventional mortgage with just 3% down. It's no longer necessary to save up 20%. It can be quite challenging to save 20% when rent is high, you're paying down student loans and home prices and mortgage rates seem to increase daily.

If you do put down less than 20%, though, you'll need to pay for private mortgage insurance (PMI) to protect your lender in case you default on your loan. It may increase your monthly mortgage payment, but you may be able to cancel it once you reach 20% equity.

Even if it costs you an extra $150 per month or $1,800 per year, it might help you buy a home much sooner than if you waited and saved that money to make a larger down payment. A 3% down payment on a $400,000 home is $12,000; a 20% down payment would be $80,000.

There are first time homebuyer programs available that can help with grants, down payment assistance—even PMI payments. Reach out to our friends at Thrivent Credit Union to learn what programs you may qualify for.

Owning typically comes with far more expenses than renting. It's important to understand these when you're considering buying vs. renting.

• Rent (which often includes property taxes plus basic utilities)
• Security deposit
• Electricity and/or natural gas
• Furnishings
• Renter's insurance
• Parking
• Pet deposit

• Mortgage principal and interest
• Mortgage insurance (if you put down less than 20%)
• Property taxes
• Electricity and/or natural gas
• Water service
• Trash removal
• Furnishings
• Homeowner's insurance
• Hazard insurance (i.e., flood, earthquake, windstorm)
• Maintenance, repairs and improvements
• Homeowner's association fees, if required
• Extras such as landscaping, pool maintenance and pest control

If you want to understand what it's like to buy a home right now, you should talk to experienced real estate agents who work in the area you're targeting. Gathering general information from the news is a good place to start and can help you come up with good questions to ask agents.

That said, you're unlikely to find a newspaper article that can give you local details. Maybe the floor plan you want in your target neighborhood is the same one everyone else wants, and you need to prepared to pay above the asking price rather than base your bid on the area's average price per square foot.

If you're planning to buy a home in an area with increased inventory, that's great news. You should have more homes to choose from and more negotiating power—or at least be less likely to encounter a bidding war.

Another key aspect to consider is how long you intend to stay in the home you want to buy. The transaction costs you'll pay to buy and sell a home can make it financially unwise to purchase one if you don't plan to stay there for several years or longer.

When you buy a home, you pay closing costs on your mortgage, which can cost 2% to 5% of the loan amount, or $2,000-$5,000 for every $100,000 borrowed. Your costs will depend on which lender you choose, whether you pay points to lower your interest rate and local expenses, including real estate transfer taxes.

When you sell a home, you'll pay a real estate commission of 1% to 3% to the agent who manages your listing. You'll also pay the buyer's agent a similar commission. This commission decreases how much money you get from the sale.

You may also spend some money to make your existing housing more attractive to buyers through painting, cleaning, repairs and staging. And, of course, it can cost a fair bit of money to move your stuff.

If you make a small down payment, it's even more important to plan on staying put because you're at risk owing more than your home is worth if your home's market value goes down. It can be challenging to move if this happens because you won't get enough money from the sale to pay off your mortgage.

Waiting may offer you a chance to save money, but real estate and financial markets can be fickle. Here are some simplified possible outcomes:

• Home prices decrease, mortgage rates increase: Likely not much savings for you.
• Home prices increase, mortgage rates decrease: Likely not much savings for you.
• Home prices increase, mortgage rates increase: Costs likely increase for you.
• Home prices decrease, mortgage rates decrease: Costs likely decrease for you.

The magnitude of the increase or decrease matters, too and other variables may be at play, such as your income and expenses, which are also subject to go up and down. Waiting to buy until housing market conditions are favorable is like trying to time the stock market.

Ultimately, if your finances are in good shape and it makes more sense for your lifestyle to buy rather than rent, you might just want to ignore the market.

There's no way of knowing whether the type of home you want to buy will become more or less affordable in the next 12 months. There's also no way of knowing what will happen to your finances. You're taking a risk when you buy a home or make any other major purchase or investment. You just have to decide what risks you prefer to take. Getting professional insight from local real estate agents and your financial advisor can help inform your decision in a way that no amount of online research can.

If your personal finances aren't in the best place right now, that doesn't mean you can't become a homeowner. It just means that you need to figure out what you can realistically improve to become a better mortgage candidate. Here are a few ways you can do so:

The amounts you owe and your payment history have more impact on your credit score than anything else. The three most effective ways to improve your credit score are:

• Having a strategy for paying down debt
• Requesting a credit line increase (without also increasing your spending)
• Setting up automatic payments or another system for making payments on time

This doesn't mean you need to get rid of all of your debt as fast as possible. It's important to use debt wisely—for instance, prioritize paying down your loans with the highest interest.

If you feel like the rug keeps getting pulled out from under you, you're not alone. Inflation, mortgage rates and home prices going up can feel like it wipes out the benefit of saving extra money to buy a house.

Still, it's hard to have too much cash on hand when you're planning to become a homeowner. You'll need money for your down payment, closing costs and moving expenses, and you'll want to have savings stashed away for potential future home repairs or income loss.

There are many ways to earn more income—ask for a raise, sell things you don't need anymore, pick up some odd jobs. If you could do one of those things, you're likely already doing it.

This standard advice can be frustrating because not everyone has access to better job opportunities or the energy to start a side hustle. You might be a caregiver, have a disability or don't have the credentials yet for a major career shift. None of these things make you unworthy of homeownership.

If you can't earn more income, try to focus on keeping a steady job and a steady income: Lenders like stability. Also, look into programs that help people with low-to-moderate incomes become homeowners.

Clearly the decision to buy a home amid the current housing market—or any housing market—has a lot of moving parts. And it's highly personal because you also have to consider your individual finances, the needs of your loved ones, and how owning a home fits with your sense of fulfillment and lifetime aspirations.

Reach out to our friends at Thrivent Credit Union to work through your individual costs and goals. They can look at your specific situation, walk through your projected costs and factor in your potential loan opportunities, and help you figure out if entering your area's housing market and buying a home now is a smart move for you.