After years of record-breaking appreciation, property values are facing their first real test since 2019, as mortgage rates rapidly rise and put downward pressure on housing prices. As such, many real estate investors are rightfully wondering if they should invest now before rates rise, or if they should wait for a possible price correction.
This is an important question for real estate investors, and luckily, we can answer it for ourselves with simple math.
In this article, I will talk you through how returns would differ if you bought now versus waiting for a “crash”. I’ll also demonstrate how you can use calculators on BiggerPockets to do these calculations yourself.
The variables
The question I’m seeking to answer is — should I invest now before rates rise further? Or should I wait for a potential price correction? There are just two variables we need to consider to answer these: interest rates and home prices.
Let’s create two scenarios. The first is buying now (mid-April 2022), where interest rates for an investor on a 30-year fixed-rate mortgage are about 5% and the median home price in the U.S. is $400,000.
The second scenario is going to be a market crash scenario, where the median home price declines by 10% to $360,000, but that doesn’t happen until the end of 2022, at which interest rates for an investor increase to about 5.75%.
To be clear, I am not saying that a crash is going to happen. I personally think the more likely scenario is that price growth starts to flatten out in the coming months, and perhaps even decline at some point within the next year or so. But, I don’t think a 10% contraction is likely.
Overall, low inventory and demographic demand will likely put upward pressure on housing prices and counteract the effect of rising interest rates. However, we’re in strange times, and the direction of the housing market is unclear.
For the purpose of this article, I am going to model what I would consider a true…