US home sales have been in sharp decline in recent months, and many worry that we are headed for another market crash. In fact, some analysts claim we are in a housing recession already.

With so much uncertainty ahead, it’s natural to wonder when the best time to invest in real estate is. On the one hand, mortgage rates have been rising fast over the last year, which means you could pay more in mortgage interest if you buy later instead of sooner. On the other hand, home prices are higher than they’ve ever been and may be due for a price correction, which means homebuyers may benefit from waiting for prices to fall.

Should you lock in a mortgage rate now or wait for housing prices to drop in a potential housing crash? Read on to find out!

The Future of Interest Rates

The two main variables to consider in today’s real estate investing market are home prices and mortgage rates. Each has a huge impact on the final cost of a property, so you want a good deal on both.

Right now, mortgage rates are going up fast because the Federal Funds Rate, which acts as the base rate for all interest rates, is increasing. The Fed has been raising its rates steadily since March (in an effort to tame inflation), and they don’t seem to be slowing down anytime soon. 

This means you’ll likely pay less interest on a mortgage today than you will if you wait. Today’s average 30-year fixed rate mortgage of 6.5 – 7.5% is still at historical lows if you look at past decades; therefore, investing now may very well be in your best interest. Before you go all in, it’s worth considering what home prices will do in the future as well. 

The Future of Home Prices

If home values drop by over 10% in the near future, the lower price point could be enough to offset whatever higher mortgage rate you’ll pay, which means waiting to invest could be the smarter option. 

However, unlike mortgage rates, the future of home values is highly uncertain. Here are some possible scenarios: 

• If mortgage rates continue to rise, it will make homeownership less affordable, which lowers the demand for buying real estate. Sellers, in turn, may lower their asking prices, causing home values to go down (albeit gradually). 
• Alternatively, if rising mortgage rates are accompanied by rising wages (from a growing economy), there could be minimal change to home values. Though mortgage rates would go up, higher wages would allow homebuyers to afford higher rates, so sellers could keep their asking price high.
• Finally, a third scenario involves a housing market crash, in which home prices fall dramatically because of a burst housing bubble. A housing bubble is a market in which home prices are artificially high due to overvaluation and speculation. 

It’s impossible to tell for sure which of these scenarios will happen; therefore, if you want to protect yourself against the biggest risk, the real question is: are we headed for a real estate market crash?

Are We Headed for a Housing Market Crash?

Whether we’re headed for a housing crash or not has a huge impact on when is the best time to invest in real estate. After all, US homeowners lost a cumulative $3.3 trillion in home equity during the last housing crash in 2008. You don’t want to lose a lot of money on a bad investment!

Fortunately, the housing market looks much different today than it did back then, and a housing crash is less likely as a result. Sure, housing prices have reached record highs as they did back then (with the median home price passing $400,000 in the second quarter of 2022 for the first time ever) but for different reasons. 

In 2008, home prices were propped up by lax mortgage lending standards and other irresponsible investment behavior. However, today’s home prices are up due to simple supply and demand. Building delays like lumber and labor shortages have led to a low housing inventory, and a decade of affordable mortgage rates (around 3-4%) have fueled high demand for buying real estate. The federal government now tightly regulates the mortgage industry to help prevent a repeat of 2008. 

Although a housing crash is always a possibility, it’s highly unlikely. If anything, there will be a gradual price correction as the real estate market begins to cool off. This means you’re better off locking in a good mortgage rate today (as they’re most likely going to continue rising) than trying to wait for home prices to drop, which if they do, they’re not likely to drop by enough to justify a higher mortgage interest rate. 

The Bottom Line

Ultimately, only time will tell if it’s better to invest now or later (or if it will make much difference at all). The key is to run the numbers based on your current knowledge and go from there. If real estate investment shows promise for a high cap rate or high cash flow, now’s as good of a time to buy as any. Don’t try to time the market because it rarely works. 

Even if home values drop significantly, your investment property is bound to appreciate over time; therefore, you will only lose money if you hold onto it for a short period. The longer you hold your investment, the higher the chance you will profit. 

Investors that bought and held properties when interest rates were 9% still ended up having their properties appreciate in value. When the rates dipped low enough, those investors simply refinanced their mortgages to lock in additional monthly savings and cash flow. Even the investors that bought and held properties in the pre-great recession bubble have now had their properties appreciate in value as well. The ones who never bought for fear of price inflation, deflation, or mortgage rate uncertainty are the investors that are living with regret.

Another thing to keep in mind is that with most investment properties, you make your money when you buy, not when you sell. Even in today’s market, you can find good deals on foreclosures and tax deed sales that are selling far below market rate. Try out PropertyOnion.com’s free property search tool to find one in Florida, one of the country’s hottest real estate markets right now. If you do, you have a good chance of selling for a profit later especially if you improve it!