Buy Now or Wait for Rates to Drop? Why Dave Ramsey Says Buy

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Today's topic: Dave Ramsey says now is the time to buy

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, I am the Mortgage Mom, and today — as I promised last week — we're going to talk about Dave Ramsey coming out and saying that now is a good time to buy. This show is interactive, so you're welcome to put your questions right into the feed and I'll read them out loud and answer them.

One housekeeping note: you didn't get a text message from me today letting you know I was going live. We had a little commotion here at the house right before I was supposed to go on — a neighbor accidentally crashed a car into the power pole in our front yard, and I wasn't sure whether I'd have power. So I turned the notifications off. I didn't want to send out a link for a show that might not happen. Normally you'll get one text a week with the topic and the link to join.

The article: why Dave Ramsey says now is the time to buy a house

I pulled an article from TheStreet, published October 2nd, called “Why Dave Ramsey says now is the time to buy a house.” I don't want to take credit for any of this writing — I just want to bring it to you, because it says a lot of what I've been saying on this show for the past year.

Here's the setup. So many people right now are sitting on the fence. The normal cycles — buying, selling, upsizing, downsizing — aren't happening. Everybody's staying put, because rates are high and it would cost more per month to move than to stay. You're retiring and the kids are gone and you don't need the big house or the maintenance. You're in a condo with a baby on the way and you need more room. You've never bought at all and you feel like you just need to wait. Those are real, normal life circumstances, and a lot of people have them on hold.

Now here's what the article says. Many potential home buyers have been patiently watching the market and interest rates, waiting for the right time to buy. Dave Ramsey believes that if an individual or household has a few key financial considerations in place, relatively high interest rates ought not to be of big concern. “If later the interest rates come back down, you're not stuck,” he has said, according to TheStreet — “just refinance and dump the old mortgage.”

We have said that numerous times: when rates come down you can refinance into a better monthly payment and pay less interest. But notice the front half of his sentence. The financial considerations have to be in place first.

Ramsey's conditions: debt paid off, reserves funded

When the Fed raises interest rates, mortgage rates almost always go up too — that's from Ramsey Solutions' own website, quoted in the piece. And a mortgage lender won't lend you as much, since higher rates increase your debt-to-income ratio. That means less buying power when you're shopping, and higher monthly payments.

So whether to buy depends on your situation relative to your other debt. Ramsey believes that if you have consumer debt — a credit card balance, student loans, a car payment — you should focus on paying that off before you buy a house. And you should push buying down the road if you don't have a fully funded emergency fund worth three to six months of your typical expenses.

I agree with that. I think that's phenomenal advice. Things come up. You might lose a job. Something needs to be repaired — an air conditioning unit goes out, a roof needs work. You're the homeowner now; those responsibilities are yours. You need at least three to six months set aside in reserves so that if something happens, you can take care of it and not default on your loan.

The article continues: if you have to make payments on debt in addition to your house payment, you'll feel like you're drowning. Not only that, it'll be hard to find room in your budget for other important financial goals, like investing for retirement or saving for your kids' college. But if a potential buyer does have cash set aside for emergencies and is debt-free, Ramsey says it's a great time to buy.

Less competition is the buyer's advantage

Here's the part I want to expand on. Because rates are high right now, fewer people are buying — which means you won't have as much competition when you make offers.

Let me get into that in more detail. If you're a buyer — first-time or repeat — with a lower down payment, using down payment assistance, or you're a veteran using your VA loan with zero down, or FHA at three and a half percent, or conventional at 5% down, those are fabulous loan products. But when you go in to make an offer and there are other offers at the same time, you are at the bottom of the totem pole. The seller looks at multiple offers and chooses the one they believe in their heart is going to close. They don't want to go through the transaction more than once. They don't want the deal to fall apart and go back on the market and do the showings and the open houses all over again. So if you have a lower down payment and somebody else comes in with a higher down payment or all cash, the chances of that offer being chosen over yours are very high.

When there's less competition and you're the only person writing an offer on somebody's home, it's much easier for that seller to negotiate and accept your contract. There are other things that go with a crazy market too — overbidding, appraisal contingencies getting waived so you can't lean on the property appraising at value. But that's the main point: if you're buying with a lower down payment, or you need the seller to pay some closing costs to get you into the home, those things are easier in today's market than they will be in the future.

The article closes on the same note. It's never a popular move in real estate when the Federal Reserve decides to raise interest rates, but Ramsey says it's not the end of the world. This is still a great time to buy a house — you just might pay a little more than you would have a few months ago. It's also a good time to sell. And if you already have a fixed-rate mortgage locked in, you're in good shape too. Don't listen to the doom and gloom all over the internet and the news; owning a home is still more than possible and you still control your financial future.

That drove home everything we've been saying on this show about getting ahead of the game before the herd gets started. Once we start hearing that rates are going to come down, a ton of people come out of the woodwork to start shopping, and you don't want to be caught up in that. Get something locked in now; the opportunity to refinance later is absolutely there. They cannot keep interest rates as high as they have been forever.

Market update: bonds, the war, and this week's rates

We've had quite a roller coaster. It's only Wednesday, and since Monday we've been watching the bond market, US Treasuries, and everything else that moves our mortgage rates.

As I've mentioned in previous shows, mortgage rates are not directly connected to the Federal Reserve prime rate. They're connected to things like Treasuries and mortgage-backed bonds. They do tend to move with the Fed — when the Fed goes up, most of the time we see rates increase — but what's really driving it is those Treasury yields: are people buying into bonds, are they selling their bonds, what are they doing?

Right now, with the tragedy in Israel and the war they're now fighting, a lot of people are nervous and unsure how this affects things. Investors have started buying bonds and Treasuries instead of more volatile stocks. So this week — and it's only Wednesday — yesterday and today we've actually seen mortgage rates start to improve.

The Fed minutes came out today

I also saw that the Federal Reserve released their minutes — where are they right now, what are they thinking about the next meeting. At the last meeting they announced they were holding steady but expected at least one more increase this year. That's what we've all been prepared for. But those minutes came out and it actually looks like they might be done. They may not move that rate any higher.

At the first signal that rate increases might be finished, we know there's a light at the end of the tunnel for rates to eventually come down. Now remember: just because they hold steady doesn't mean rates fall overnight. It means they hold there for a while to keep working on inflation, and then they start to bring rates down. But at that first glimpse of “we're done,” people start to feel like they can do this — I can get out there, I can start looking, I can buy, and I can refinance down the road. I'm not going to be trapped in a horrible interest rate for the next three years.

Nobody knows for sure. We have to wait for the next meeting to see what they really say. But according to the minutes that came out today, it looks like we might be done, and I think that's really good news.

Housing associations tell the Fed rates are too high

I got another article by email from SoFi that tied right into this. It's called “Interest rates are too high, housing associations tell Fed.”

Home buyers are in a pinch: costs are notably high and inventory is notably low. Now America's major housing associations are pointing at the Federal Reserve and calling for action. The Mortgage Bankers Association, the National Association of Realtors and the National Association of Home Builders penned an open letter to the Fed pleading for it to reconsider its interest rate policy.

The Fed slashed rates to near zero when the pandemic ground the economy to a halt, then hiked to prevent overheating and get pandemic-era inflation under control. The Fed's benchmark rate currently sits in the range of 5.25% to 5.5%. But the letter emphasizes growing nervousness about the fallout of high rates: mortgage rates have reached a 23-year high, while application activity has hit its lowest level since the mid-1990s. The letter asks the Fed to firmly announce no further rate hikes, and to ensure a hands-off approach on its mortgage-backed securities holdings, at least until the housing market sits on a solid foundation again.

The message may be intended for the central bank, but it's a welcome signal to home buyers struggling with a tough market too: you are not alone in your frustration.

What I think happens next

You're probably not watching the financial news the way I do. Everybody has a different job. Where I don't know many things about other industries, this is the industry I know — I've been working in it for the last 29 years. I started in 1994, so I'll probably have to start saying 30 soon.

From that history, I can tell you the market is going to start to pick up. Is that happening tomorrow, or next month? No. I think we have a good solid three, maybe even six months before things really start to change and heat up. It takes a while for information to get out there, for it to catch on, for somebody to decide to buy a house and then tell a friend who tells somebody else. That takes a long time to move people.

So I'm doing my part and giving you the information. If you've been on the fence, if you've been feeling like you needed to put it on hold until things improve — I would get started today. I'd get your pre-approval going. If you have a house to sell, contact your realtor and find out what it's worth and how much equity you can move over to the next home. Find out how much house you can buy and what that monthly payment looks like. And get the education from your loan officer on what that payment would look like if the rate were 1% lower, or 2% lower.

This is my personal opinion — I'm the Mortgage Mom, this is what I think is going to happen, and nobody has a crystal ball. But when rates start to come down, I think we see a very crazy market and a big uptick in purchases, with a lot of people coming off the fence at once.

Wrap-up

If you want to know when I go live, text the word MOM to 844-935-3634 — that's 844-WE-LEND-4. One text a week with the topic and a link to join, and it's the same number to call the office. You can also go to mortgagemomradio.com — don't forget the “radio,” because mortgage.com is not me. I'll be back again next Wednesday right around one, and hopefully next week there's no neighbor's car in the front yard and the power stays on. Talk to you soon.