With interest rates historically high and elevated home prices, homebuyers are shying away from today’s housing market.

Add to this predictions about a cooling housing market, and you have what appear to be all the right reasons to hold off buying that dream house—or any house—for now.

But is it wise to wait out the market in the hope that prospects will be better next year? The answer isn’t as simple as you might think.

It’s not just the cost of the house

As you undoubtedly know, the purchase price is only one part of the equation when you buy a house.

Unless you’re one of the few people who can pay cash, you’ll require a mortgage. And the interest rate on that mortgage will materially affect your monthly payment.

Let’s look at a simple example to drive the point home.

Mortgage rates home prices
Source: Creditnews

On a $600,000 house with a 30-year term, 20% down, and a 3% interest rate, your payment on the mortgage alone (excluding taxes, insurance, and other fees) will be $2,024.

As the interest rate goes up, so does the monthly payment. For example, an increase from 3% to just 5% adds $553 a month to your payment making it $2577. An interest rate of 10% more than doubles your payment at 3%.

You can see how even slight rate increases can have an outsized impact on how much house you can afford—or whether you can afford one at all.

Mortgage rates and home prices in historical context

You can make a compelling argument that today’s property market is unfavorable to buyers.

After all, the average mortgage rate as of early July 2023 is over 7%—the highest since early 2000. It was half that, under 3%, less than two years ago.

(Note that while a 7% mortgage may seem high in the context of the last few decades, it’s actually below the 50-year average. Between 1971 to 2023, the 30-year fixed rate mortgage averaged 7.74%.)

In the table above you can see the difference in monthly payments between 3% and 7% is substantial. That assumes home prices were static, but they weren’t

In the first quarter of 2023, the median sale price of a home was $436,800. Although that is a $43,000 drop from the previous quarter, home prices are still up 50% from mid-2020.

Clearly, both key variables—home prices and mortgage rates—are historically high. But will they stay here?

Where mortgage rates are headed—and why it may not matter

Most interest rate traders in the market still expect further hikes in 2023.

As of early July 2023, nearly nine out of 10 interest rate traders anticipate that the Fed will raise interest rates another quarter percent (25 basis points) at the July FOMC meetings.

If this happens, we can expect mortgage rates to rise similarly.

Still, some believe a top is approaching, with the economy increasingly ripe for a reversal in rates.

Matt Vernon, head of retail lending at Bank of America, says their analysts predict mortgage rates will “fall to 5.25% by year-end.” And the National Association of Realtors (NAR) sees “the 30-year fixed mortgage rate progressively falling to 6% this year, and to 5.6% in 2024.”

Either way, housing prices may not respond in a way that homebuyers expect. The culprit: low home inventory.

Recent data shows that housing supply remains near historic lows, jacking up home prices. Jack Macdowell, chief investment officer and co-founder at Palisades Group, says housing inventory remains roughly “46% below the historical average dating back to 1999.”

Orphe Divounguy, senior economist at Zillow, is more blunt: “There are simply not enough homes for millions of people.”

Now what?

The decision to get your own place doesn't come down to just financial considerations.

How important to is it to you to be able to live in your potential dream home one year earlier? And how much do you value the peace of mind of locking down a rate and purchase price today?

Keep in mind our 10% mortgage rate isn’t hypothetical.

In fact, 30-year mortgage rates in the 1980s surpassed a dizzying 18% (and people still bought houses). So, while rates are still relatively high today compared to recent years, they are nowhere near the level we’ve experienced historically.

Unfortunately, the sky’s the limit.

Something else to think about: If rates do dip lower, today’s purchase doesn’t mean you're stuck at today’s interest rate. For one, you can choose a shorter amortization period and renegotiate your rate later at the current market rate.

Or, you can refinance your existing mortgage with your bank before the term ends. This option can come with significant fees, so be sure you consider the costs in advance.

So if your dream home is right there within reach, and you can afford it at current rates, taking the plunge today isn’t entirely out of the question. But if you're still on the lookout and are comfortable with the possibility that rates and prices may not fall next year, it may make sense to hold off.