Some have argued now is not a good time to buy a house. They point to (1) low levels of inventory driving up prices; (2) interest rate increases making mortgages more expensive; and (3) the gap between median wages and median home prices implying the lack of affordability. Notwithstanding, it is my contention now is still a good time for a buyer to jump into the market whether as an investor or a first-time homeowner.
Housing Prices Will Continue to Rise
We all know the best time to buy a house is when housing prices are low. Price is determined based on the supply of housing and its corresponding demand. Many realtors look at the average supply of housing inventory to determine whether home prices are considered high. According to Redfin, a balanced housing market tends to have about six months of supply. As of the end of last year, the housing supply was approximately three months. This means on average a listed home will sell in three months, much quicker than the historical average. This leads to higher home prices. However, homebuyers cannot simply sit out and wait for home prices to fall. That is because despite the low supply of housing, demand for homes have remained strong. Experts predict there will be 3% more home sales this year compared to 2017. Millenials will soon enter the first time homebuyer’s market as the US economy continues to improve. Since millennials make up a large segment of the American demographic, we expect this influx of new first time homebuyers to continue driving home prices up.
While home prices will continue to rise, the rate of price increases should slow. This is because home prices have risen exponentially in many housing markets and such rates are not sustainable. According to the Case-Shiller Index, home prices have risen about 5% to 6% per year on average. As the median home price rises at a pace much quicker than the median wage, demand will waver due to lack of affordability leading to a more tempered rate of increase. According to Forbes, a more typical rate of home price appreciation should be approximately 3% per year.
Interest Rates Will Continue to Rise
Most buyers purchase a house by acquiring a mortgage loan. Borrowers want a lower interest rate because over the course of a typical 30-year loan the difference in a fraction of a percentage point may mean tens of thousands of dollars in savings. Interest rates are, therefore, very important. They fluctuate based on economic trends and needs. For example, after the 2008 financial crisis banks were paranoid and nobody wanted to extend credit and interest rates increased. As a result, the Federal Reserve instituted a quantitative easing monetary policy where the central bank infused the economy with cash. The Federal Reserve did this by purchasing bonds from retail banks (e.g., JP Morgan Chase, Bank of America, Wells Fargo, etc.) and depositing cash in the retail banks. In theory, this was supposed to loosen up the banks’ credit lending practices. Since the interest rate merely reflects the demand for money in the economy, the influx of cash by the central bank increased the money supply and artificially lowered demand and interest rates to historic levels. After six years of quantitative easing, the Federal Reserve ended this practice in 2014. Since then, the central bank has slowly started to take cash out of the economy and increase interest rates. We expect this practice to continue. Why? This is because
the Federal Reserve’s primary goal is to control inflation where money begins to lose value. Inflation occurs when there is too much cash actively flowing in the economy. As the economy starts to get better and economic activity ramps up, the central bank must remove cash from the economy and increase interest rates to avoid inflation. Since all economic indicators point to the US economy running on all cylinders, we expect interest rates to continue to rise to offset inflation.
Therefore, while homebuyers may wish to wait for interest rates to fall there is no indication interest rates will fall back to the historically low levels they were once at. Potential homebuyers should avoid the pitfall of doubling down and continuing to wait for rates to fall after they had just missed the bottom of interest rate trends.
Home Prices Will Continue to Appreciate at a Moderate Pace
As indicated earlier, home prices are expected to rise albeit at a subdued rate. While homebuyers do not want home prices to be high before their purchase, homeowners want prices to appreciate at a moderate rate after closing. This is because moderate appreciation will keep the housing market strong while not leading to a real estate crash when prices do not correspond with consumers’ income. Real wage growth is starting to happen, albeit slowly. According to the Wall Street Journal, average hourly earnings rose 2.9% in January this year compared to the same period in 2017. Home prices are rising at a high rate but the 2.9% wage growth corresponds to the historical 3% home price appreciation average.
There is also no indication we are in a real estate bubble. When adjusted for inflation, home values are where they were in 2004 before the peak prices of 2007. Home appreciation prices in the past six years look comparable to normal appreciation levels in the past forty years. Higher interest rates are also not scaring off homebuyers. According to the Mortgage Bankers Association, new mortgages were up 11% compared to a year ago. This is probably because buyers know now is the time to buy for the reasons delineated in this article. Homebuyers should buy now knowing their home values should appreciate.
At the end of the day, it is generally a good time to buy a home when the economy is good. The consumer confidence index is up, and unemployment rates are down. Americans are spending money and jobless claims are at their lowest point in years. For the first time in a while, both Main Street and Wall Street seem to be optimistic about the future. While nothing is guaranteed in life, many factors delineated here suggest now is a good time to buy.