Relief for first-time homebuyers: Home prices actually dropped in July

Maurie Backman
The Motley Fool

There's a reason home buyers have been struggling so much since the start of the year.

Not only have home prices continued to climb to sky-high levels, but mortgage rates have risen at a rapid clip since January, thanks to the Federal Reserve raising interest rates several times in an attempt to get inflation under control.

That's put many buyers in a position where they simply cannot afford to own a home. But new data from Redfin indicates that the red-hot housing market may finally be cooling. And that's good news for buyers. 

Here's what it all means:

Home prices are finally starting to fall

U.S. home prices fell 0.7% during the four-week period ending July 10 after reaching a record high in June. Meanwhile, sellers' asking prices fell 3% from their May peak.

Exclusive:Has the pandemic housing market come to an end? Rising inventory, price drops show shift

Another chance:As housing cools, some buyers get a second chance to grab their first choice

Plus, housing supply finally picked up in July for the first time since August 2019. And the more supply there is, the more bargaining power buyers get.

But while a dip in home prices and an uptick in housing inventory are both very positive developments, the reality is that many buyers are likely to remain priced out of the market for quite some time. And it's better for buyers to accept that reality than get in over their heads.

Will you be able to buy a home this year?

As a general rule, your housing costs, including your mortgage payment, property taxes, and homeowners insurance premiums, should not exceed 30% of your take-home pay. But based on where home prices and mortgage rates are at today, that may not be such an easy feat to pull off.

While a 0.7% drop in home prices is a positive sign by virtue of there not being a gain in prices to point to, it's also a very modest dip – one that may not make too much of a difference for buyers who were already struggling with affordability issues. And until housing supply really picks up, we should only expect home prices to continue to drop modestly.

It's a renter's world:As housing prices soared, home buyers struggled

Buying a home:How the 2022 housing market could be shifting in your favor

As such, it could pay to put off buying a home if today's combination of still-high prices and expensive mortgage rates just doesn't work for you financially. The last thing you want is to take on a home you can't comfortably afford and struggle to keep up with your payments.

Does delaying homeownership mean risking higher borrowing rates?

One reason why some buyers are still rushing to purchase homes today is that they're scared that mortgage rates will continue to rise. And the reality is, they may keep climbing, since the Federal Reserve intends to move forward with interest rate hikes in an effort to slow the pace of inflation.

If you wait until next year to purchase a home, you may get stuck with a higher borrowing rate on a mortgage. But if housing inventory picks up enough, you may also manage to snag a much lower purchase price on a home. And that could offset your higher mortgage rate and then some. So if you think now's not the right time to buy a home, don't push yourself, especially given where property prices are sitting today.

Offer from the Motley Fool: The Ascent's best Mortgage Lender of 2022

Mortgage rates are on the rise — and fast. But they’re still relatively low by historical standards. So, if you want to take advantage of rates before they climb too high, you’ll want to find a lender who can help you secure the best rate possible.

That is where Better Mortgage comes in.

You can get pre-approved in as little as 3 minutes, with no hard credit check, and lock your rate at any time. Another plus? They don’t charge origination or lender fees (which can be as high as 2% of the loan amount for some lenders).

Read our free review

We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.