Should You Buy a Home Now That Mortgage Rates Are Well Below 7%?

It may be tempting -- but proceed with caution.

There's a reason mortgage demand has slowed a lot this year compared to 2021. Home buyers have faced a major affordability crunch as mortgage rates rose at a time when home prices were already elevated.

In fact, for much of the final quarter of 2022, the average 30-year mortgage rate sat at around or above 7%. That alone has been enough to push buyers away.

But over the past number of weeks, mortgage rates have been dropping. And as of the end of November, the average 30-year mortgage rate was 6.58%, according to data firm Black Knight. And different sources show that rates have fallen even more since then.

Given that rates are down significantly from about a month ago, you may be tempted to purchase a home before 2022 wraps up. But is that a good idea? Or should you continue to wait until the market becomes more buyer-friendly?

Affordability issues persist

While you may be relieved to see mortgage rates sitting at lower levels now than they were a month ago, the reality is that today's rates are still twice as high as they were a year ago. And while home price gains have slowed down over the past number of months, prices are still elevated across the board.

In fact, we probably won't see a notable drop in home prices until real estate inventory picks up significantly. And that's unlikely to happen any time soon.

As such, while it might seem like a good idea to jump on lower mortgage rates and try to buy a home in the near term, don't forget that between higher prices and borrowing rates, you're still looking at spending a very large amount of money on housing. This especially applies if you live in a market, or are hoping to buy in one, where home prices are higher than average. And so if you made the decision to pause your home search a few months back due to affordability issues, you may want to stick to that line of thinking.

Keep the 30% rule in mind if you buy

Maybe you're in a good place financially -- you have funds for a down payment, a steady job, and a nice salary -- and so you are eager to capitalize on a drop in mortgage rates. If you're going to pursue a home purchase, just make sure that your total monthly housing costs don't exceed 30% of your take-home pay. Going above that limit could put you in a position where you struggle to not only cover your housing expenses, but also, manage your remaining bills.

Now to be clear, that 30% limit shouldn't just apply to your mortgage payment itself. Rather, it should include predictable monthly housing costs like property taxes, homeowners insurance, and HOA fees, if you're buying in a homeowners association.

It's easy to see why a dip in mortgage rates might inspire you to resume house hunting. But as you go about your search, do remember that it's still an extremely expensive time to buy a home, and that you really don't want to get in over your head and make a decision you wind up sorely regretting.