High Prices, High Rates: When To Plunge Into A Home Purchase

Buying a home is always a big decision. When home prices and interest rates are high, it can go from big to intimidating.

After years of interest rates near zero, younger adults especially may face mortgage rates higher than they’ve ever experienced. For a standard 30-year mortgage, rates have hovered between 6% and 7% from September 2024 through May 2025. Although today's mortgage rates are high, they remain significantly lower than the double-digit 30-year average fixed rates buyers saw in the late 1970s and early 1980s, as illustrated by the Federal Reserve Bank of St Louis. Still, “it could be worse” may be cold comfort for homebuyers more personally familiar with the low rates of the 2010s and early 2020s.

Prospective homebuyers lack even this comfort when it comes to home prices, though. Average home prices continue to climb, outpacing inflation. According to the National Association of Realtors, the national median price for existing single-family homes climbed 3.4% over the year ending in March 2025, bringing the median home price to $402,300. The rate of increase may be slowing, but many homebuyers continue to have trouble finding a suitable home that they can afford.

Why Are Prices And Interest Rates High?

The Federal Reserve raised interest rates in 2022 and 2023 to counter inflation. While the central bank made cuts to the Federal Funds Rate in 2024, as of this writing it has chosen to hold rates steady at a range of 4.25% to 4.5% in 2025. As a result, borrowing costs, including mortgage rates, remain higher than they have been in recent decades. Many homeowners face the prospect of higher monthly payments as they are experiencing tighter budget constraints elsewhere, further limiting housing affordability.

Housing prices are the result of many factors, and the full picture is beyond the scope of this article. But a major contributor is constrained supply. Because interest rates are relatively high, many long-term homeowners are experiencing what's known as the “lock-in effect.” These homeowners hesitate to sell their homes and forfeit the ultra-low mortgage rates they secured during the previous low-rate environment. This means that turnover on the market is lower, and that current homeowners may hold on to “starter” homes that, in a lower-interest-rate environment, they might sell to younger or first-time homebuyers. At the same time, demand for housing rose in the past few years, partly driven by the increase in remote work triggered by the pandemic.

These dynamics have created a highly competitive market for prospective buyers in many parts of the country. As both price and mortgage rates continue to squeeze overall affordability, navigating the housing market demands a clear understanding of your personal financial limits and priorities.

Considerations Before Buying

Personal Financial Readiness

Before you purchase a home, assess your overall financial picture. This is about more than saving up for a down payment. Mortgage lenders will conduct a thorough review of your financial background, which includes looking through bank statements, tax returns, your business’s financial information if you are a business owner, and other relevant legal or financial documents. While many lenders prefer that you have at least two years of consistent employment before you seek a mortgage, there is often some flexibility based on your financial profile.

Your credit score will also play a major role in your ability to secure favorable mortgage terms, so make sure your credit reports are accurate. You should be mindful of any hard credit inquiries, also called “hard pulls,” you have requested recently, for example by applying for an auto loan or a credit card. Multiple hard inquiries in a short period of time can have a negative, if temporary, impact on your perceived creditworthiness.

You may want to pursue prequalification or preapproval from a mortgage lender to get an idea of your borrowing power. Prequalification is essentially an estimate of how much you could borrow based on your financial information. By contrast, preapproval is a formal process in which you complete a full application; a successful application will yield a letter from your lender promising to lend a specific amount. In either case, keep in mind that lenders may offer an amount higher than what you can realistically afford, so setting a budget ahead of time can help to ensure you stay within your spending limits.

Many Certified Financial Planners® recommend that your total monthly housing expenses — which include principal, interest, taxes, and insurance payments — should remain below 28% of your gross monthly income. Upfront costs will be more substantial. You should anticipate putting down at least 20% of the home's fair market value to avoid having to pay for private mortgage insurance, even if a lender would theoretically accept a smaller down payment.

In addition to your monthly mortgage payment, you should plan to budget for both fixed and variable costs that come with homeownership, such as property taxes, homeowners association fees, membership fees (e.g., country clubs, community pools, etc.), utilities, furnishings, repairs and maintenance. Don’t forget to factor in one-time closing and moving costs, too.

As you work on determining a budget for homeownership, don’t sideline other financial basics. Even if buying a home is a major goal, you should not neglect an emergency fund. If you don’t already have one, build an emergency fund that can cover three to six months of your total expenses, including both fixed and variable costs across all spending categories. Not only is this good financial common sense, but some of those future emergencies may be related to the home you hope to buy. Don’t neglect this cushion.

Time Horizon

The length of time you plan to stay in your home plays a significant role in choosing the right mortgage. For those expecting to stay for the long term, a 30-year fixed-rate mortgage offers stability with lower monthly payments than a shorter-term loan, making it a popular choice. If you’re in a strong financial position and want to build equity faster while saving on interest, a 15-year fixed-rate mortgage could be more suitable. However, if you anticipate moving or refinancing within a few years, an adjustable-rate mortgage might be worth considering. (For more information on different types of mortgages, see my colleague Eric Meermann’s article “Buying Your First Home: Down Payments And Mortgages.”)

ARMs can also seem attractive when interest rates are higher, even for buyers who plan to stay long term. Borrowers hope the variability will mean they can benefit from rates falling in the future. While this approach is sometimes sound, it is important to fully weigh the pros and cons of this type of mortgage. I wrote more about this, along with my colleague Rebecca Pavese, in the article “When To Use An Adjustable-Rate Mortgage.”

Evaluating The Market And Your Personal Needs

Waiting for prices or interest rates to drop often leads to missed opportunities, as housing market shifts are unpredictable. Some homes are overvalued; others are not. Predicting whether housing prices and interest rates will go up or down in the short term requires a nonexistent crystal ball. In these ways, the housing market is similar to other forms of investment. As Benjamin Sullivan, my colleague and Palisades Hudson’s chief investment officer, often emphasizes, you should never try to time the market. While Ben is usually referring to the stock market, timing the housing market can lead to similar pitfalls.

Assuming you are buying a house as primarily a place to live, your own circumstances should weigh much more than the state of the housing market when deciding whether to move forward. Contemplate purchasing a home when it aligns with personal milestones like marriage, starting a family or job stability. Buying based on your life’s trajectory will serve you better than trying to predict economic cycles or trends. Similarly, your own credit, budget and financial goals should take precedence over whether you think mortgage rates may soon rise or fall.

Before diving in, you should take time to reflect on why you want to become a homeowner. Is it truly aligned with your personal goals, or is it influenced by outside pressures? It’s common to feel the urge to buy simply because friends or family are doing the same, without realizing you may be following a herd mentality. (For more on herd mentality, check out the episode on “Investing Fundamentals” from Palisades Hudson’s podcast, "Something Personal.”) Similarly, it can be easy to assume buying a home is the predetermined next step in adult life, when in fact you should tailor the decision to your own desires and circumstances.

When Renting Makes Sense

There’s a common belief that homeownership is always a good investment, but there is no one-size-fits all approach to housing. While homes can appreciate in value over time, the ongoing costs of ownership can significantly eat into your potential home appreciation. And, as many Americans saw when the real estate bubble burst more than a decade ago, real estate appreciation is never guaranteed. If you’re buying a primary residence, it’s more important to ensure the home fits your lifestyle, budget and long-term plans than it is to focus on future resale value.

Mortgage interest and property tax deductions are financial benefits of homeownership, but these are not always as significant as taxpayers assume. For single filers in 2025, itemized deductions must exceed the standard deduction of $15,000 (or $30,000 for those married filing jointly) to provide any additional tax benefit above the standard deduction. This means that unless your combined deductions surpass the relevant threshold, itemizing may not offer additional tax savings.

Also, mortgage interest is only deductible on the first $750,000 of mortgage debt ($375,000 for married taxpayers filing separately), a cap introduced by the Tax Cuts and Jobs Act. Homeowners with mortgages taken out before Dec. 16, 2017, may qualify for the previous higher limit of $1 million. Property taxes, another common deduction for taxpayers who itemize, fall under the state and local tax, or SALT, deduction. SALT deductions are currently capped at $10,000 annually, although pending legislation seems likely to raise this ceiling. While deductions available to homeowners can certainly sometimes help offset taxable income, these limits in combination with the currently high standard deduction mean the value is often constrained.

Renting may fit better with your goals and lifestyle. If you value mobility, travel frequently for work, or haven’t yet decided where you want to settle down, the flexibility of renting could appeal. Renting typically involves fewer maintenance responsibilities and lower upfront costs. If homeownership is not important to you on its own merits, you may want to rent and invest excess cash in other vehicles, such as the stock market, which may offer better long-term returns.

When Buying Makes Sense

Despite the challenges of high home prices and elevated interest rates, buying a home can still be a wise financial decision for some. In certain areas, the month-to-month cost of renting may surpass the cost of owning, making homeownership a more practical and cost-effective option over time. In addition, building equity in your home is a form of forced savings. Equity is one of the major reasons why, traditionally, many people have viewed buying as more frugal than renting.

For families planning to grow, stability is often a key consideration. Owning a home provides a sense of permanence, allowing children to benefit from a consistent environment where they can build lasting friendships and establish roots within the community. As my colleague Melinda Kibler highlighted in her recent article, “A Parent’s-Eye View Of School Choice,” education quality and school proximity can significantly impact a family’s decision of when and where to buy a home.

If interest rates drop in the future, homeowners can refinance their mortgages, potentially lowering monthly payments. However, it's important not to rely too heavily on this strategy without understanding the full picture. Even if interest rates drop, which is not guaranteed, refinancing comes with upfront costs, such as closing fees, that can add up quickly.

Tips for Buyers in a High-Price, High-Interest-Rate Market

If you decide homeownership is important to you, there are still effective ways to position yourself for success in a relatively expensive housing market. Begin by creating a budget that works for your particular circumstances. Apply for mortgage preapproval to determine your true purchasing power and remember to hold to your budget regardless of the maximum amount you’re approved for. If you are buying your first home, explore first-time homebuyer programs and down-payment-assistance options, making sure you understand the eligibility requirements for each.

Working with experienced professionals can make a difference. A knowledgeable real estate agent and a reputable mortgage broker can help you identify opportunities, navigate negotiations and avoid common pitfalls. When negotiating with sellers, don’t hesitate to ask for concessions. Take time to compare mortgage options from different lenders to ensure you secure the most favorable terms.

Trying to time the housing market can be just as risky as attempting to time the stock market. With investing, analysis of historical data has shown that missing just a few of the stock market’s best days can dramatically reduce long-term returns. In real estate, waiting for the perfect moment could mean missing out on favorable opportunities, whether that’s a good price, a desirable home or a lower mortgage rate. Market conditions fluctuate, and some of the best buying opportunities happen when conditions seem uncertain. By making decisions based on your personal situation rather than trying to predict market highs and lows, you’ll be better positioned to achieve your homeownership goals.
 
 
Editor's Note: Palisades Hudson's staff sometimes use AI tools in creating work for Sentinel and other company publications. We identify work created with AI assistance with a note such as this one for transparency. However, all of Palisades Hudson's articles receive a thorough review from a financial professional before publication to ensure clarity and accuracy. AI tools, when used, supplement our staff's existing expertise and are not meant to replace it.