I have a question for the board. I am looking at two homes that are the same price.  One is an inventory home and the other we would build.  Both are the same price.  We would rather build because we like the floorplan a little better and we can customize the home to our needs. 

We are ok with building if mortgage rates stay relatively low for the next six to eight months.  If they are 5% or lower then we would want to go ahead and build even if we did have to pass up the 4% mortgage rates today.  What wouldn't be worth it for us is to pass up on an acceptable home now and 4% rates and build and have to lock in at rates above 5% or so.  The cost difference on a monthly basis would become significant if we were talking about rates that were 1.5 to 2 percent higher.

What do you see happening in regards to rates over the next six to eight months?

No one can tell you what rates will be next week, much less six months from now. I can say that, simply stated, rates are a function of the economy. If the economy heats up and wages and prices start to increase (inflation) then you will see higher rates. So if you think that the economy will be significantly inproved six to eight months from now then the prospect for higher rates are greater. There are other factors that could increase rates without an uptick in the economy, but they are less likely.

More importantly I think you should question whether the home that you buy should be a function of interest rates. Think of it this way, after you close on the house you choose you are going to go home every day from work and walk into that house. How are you going to feel? If you "settle" and rates don't go up are you going to be resentful thinking wow had we just known we could have gotten the home that we have always wanted? Or if you wait and rates do increase, will you feel "strapped" with a house payment that you can't afford or will you feel like 'yeah, the payment is a little higher, but it's worth it.'  Just pick the choice that is easiest to live with in the long run.

Harlan,

Thank you for your response. I do think that we are on the same page in general.  That is why I would still to choose to build if I knew that rates were going to go up to 5% or so. We want to build for the specific you reason you state and we have built homes in the past.  So that we get a home that really fits our needs.

But I do think it is a little unfair to say that the home you buy will not at all be function of rates.  I would think that anyone would say that rates will have an impact on the home they buy if you are talking about rates going from 4% to 7%.  For example, a $300,000 loan at 4.25% is $1500 a month in P&I while that same loan is $1800 at 6.25%.  I think most people would say that would affect their decision.

We do want to build this house over the inventory home.  But if rates go up to 6% in the next eight months, I don't know that it would be worth $300 a month. 

But please tell me if I am missing something. I realize you do this for a living.  I just have my two cents that is worth one.

Donnie,

Rates certainly have an impact on whether consumers purchase a home and what price home they can afford and this rightly should be a concern. But we are not disussing what rates are, but what they might be in the future -- an unknown. The risk that rates could increase is always a factor when building. Since you have built before you have taken that risk in the past. After the house was built you may have closed on a rate that was less than you expected or it might have been more unless you purchased a commitment. And that is my point. You must decide on the risk that you are willing to take to get what you want. My personal opinion, which is worth what you are paying for it , is that the risk is fairly low that rates will be dramatically higher in the next six to eight months. But if I am wrong I'm not the one that will be making that payment, you will. When you plan with imperfect infomation (and all plans are made with imperfect information) you must live with the decision. There are things you can do to mitigate risk -- buy a commitment, don't build buy existing, put a financing contigency in your contract with the builder limiting whether you have to close if rates go above a certain amount, etc. -- but you can't eliminate it.

So you aren't missing anything. It sounds like you are considering your options and being thoughtful with you plans. My point wasn't to say that interest rates don't influence purchasing decisions, just that you shouldn't buy a house you don't like due to a possible change, up or down, in interest rates. That's the tail wagging the dog. You don't buy a house to get a loan, you get a loan to buy a house.

Good luck! I'm confident that on reflection you will make the choice that is right for you and your family.