Pros and Cons of Waiting Out a Hot Housing Market

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If you're looking to buy a new home, you probably already know it's a seller's market out there. Bidding wars and all-cash offers are becoming increasingly common. Not surprisingly, two-thirds of consumers say now is a bad time to buy a home, according to a recent Fannie Mae survey.

One potential workaround is to wait out the market until things normalize a bit. It isn't necessarily a bad idea, assuming you can afford to stay in a holding pattern until you find a home (and a price) that feels right for you—but it isn't entirely without its risks. Read on for the pros and cons of waiting out a too-hot housing market.

The Current State of the Housing Market

A variety of factors led to today's turbocharged housing market. The Federal Reserve cut its target interest rates just as the pandemic triggered economic shutdowns. Mortgage rates, in turn, declined as well, which made it cheaper to borrow money and attracted homebuyers to the market. Rates for a 30-year fixed mortgage dropped as low as 2.68% in December 2020. As of the time of this writing, the weekly average rate is 3.09%.

These low rates paired with an already limited inventory set the stage for a seller's market. In September 2021, properties generally stayed on the market for just 17 days, according to the National Association of Realtors (NAR). With demand high and supply low, prices have also shot upward. NAR data put the median existing-home sale price at $352,800 in September—13.3% higher than the same month the prior year. With numbers like these, many would-be homebuyers are walking away until conditions are better for buying.

The Benefits of Waiting Out the Market

Pausing your house hunt may not be a bad idea if you're able to wait things out. Exactly when the market will "correct" is anyone's guess, but there are rumors that interest rate increases are on the horizon. If that happens, mortgage rates are likely to do the same, which could discourage buyers—and possibly lead to cheaper home prices.

Those who've already chosen to step out of the market can use this time to prepare for a future home purchase by doing the following.

Improve Your Credit

The stronger your credit, the more likely you are to get the best mortgage rates and terms. In some cases, it can be the deciding factor in whether you get approved at all. Now is an ideal time to take steps to improve your credit before buying a home. Making on-time payments every month can go a long way in maintaining good credit. It's also wise to limit big purchases and avoid applying for new credit in the months leading up to a home purchase. Paying off credit card debt can help increase your scores quickly as it reduces your credit utilization ratio, which is an important factor in your credit scores.

Pay Down Debt

Reducing your debt load can help bring down your debt-to-income ratio, which is a key part of a borrower's mortgage application. It reflects the amount of your monthly income that's currently going toward debt payments. Accounts like credit cards, student loans and auto loans are all on the table. See if you can free up money in your budget to pay off more debt and increase your credit score.

Update Your Budget

Speaking of budgets, take a closer look at your spending habits to clarify where your money is going each month. The idea is to reduce or eliminate unnecessary expenses. (Your debit and credit card statements can help you track your spending.) A working budget can also prevent overspending and unlock money for paying down debt or beefing up your down payment.

Save for a Larger Down Payment

Buyers who come prepared with a higher down payment are often more attractive to mortgage lenders, especially if they have strong credit to boot. Putting down more money upfront will also result in a smaller home loan and reduced monthly mortgage payment. If you can get to the 20% threshold, that's even better. In most cases it'll help you avoid paying for mortgage insurance.

Read Up on the Homebuying Process

Buying a home is a multistep process that can be overwhelming if you don't know what to expect. Understanding important mortgage terms and familiarizing yourself with the mortgage prequalification and preapproval processes are great starting points. The goal is to get acquainted with what you'll likely encounter on the journey.

Potential Risks of Sitting Out

Everyone's financial reality and housing needs are different. Zero in on your local housing market and run the numbers to see if it's better to buy now or rent for the time being. Your monthly rental payment may actually be in line with a new mortgage, depending on your down payment and loan amount. But if you choose to rent, you'll miss out on the opportunity to build your savings and improve your credit.

Meanwhile, no one really knows when (or if) the housing market will cool off. There's always the chance that homes will continue to get more expensive, and interest rates will go up—two things that make buying a home more expensive. This is all to say that waiting out the market isn't a guaranteed strategy.

The Bottom Line

It's impossible to predict what the housing market will look like in the future. Waiting things out is one potential path to finding a home that's in your budget. Another benefit is that it gives you time to improve your credit as much as possible before applying for a mortgage. Take the first step by checking your credit score and credit report for free with Experian.