What factors should you be considering in todays housing market
I hear this question often, many times from clients who are in the market. I also ask myself this everyday. Like many Americans, my family and I are struggling to find a home in today’s market. Lack of inventory, rising prices and a shortage of time on the market is making it extremely difficult for home buyers to find their next home. I’m battling the Boston market, and not every market is the same. I want to look at some current housing stats and trends that can hopefully help in making your own decision.
Background and Current Housing Stats
Unless you’ve been living under a rock, you know prices are going UP! Like straight up. The housing market has been on fire across the country, with some markets hotter than others. But as a whole, the market has changed dramatically over the past two years. For you home buyers out there, is there hope?
Some U.S. statistics I’ve been following to put the recent surge in home pricing in perspective:
In 2021, the average home price rose 18.8% year-over-year
30-year mortgage rate skyrocketed to 3.92% from 2.73% a year ago
It was as high as 4.18% last week before coming back down
According to RedFin, a few interesting stats to consider
44% of homes on the market have an accepted offer within one week
57% within two weeks
41% of homes are selling for over asking
Active listings were down 27% year over year
The last piece of data working against current home buyers: the fallout from the financial crisis of 2007. Since then, homebuilders have been reluctant to increase the pace of new home builds. We are finally getting to a pace that will keep up with population growth (around 1.5 million homes), however the supply of new homes has fallen far short in the last 12-14 years.
When you take it all into account, it’s a great time to be a home seller. And an extremely difficult time to be a buyer. We have great technology at our fingertips to analyze and view homes, but how hard is it to make a decision when homes are under contract within a week and mortgages continue to rise at an alarming rate? There are so many factors to consider, not to mention the potential bidding war you may be getting yourself into. It’s a lot to take in. My family has felt it more than ever as of late.
Now there could be some hope. Mortgage applications have dropped as interest rates have risen recently. Year over year mortgage applications are 9% lower. It’s hard to tell if this has more to do with the higher rates or if it's a symptom of lower inventory, and therefore fewer opportunities to purchase a home. My guess is it's a bit of both.
https://www.cnbc.com/2022/03/02/weak-mortgage-demand-could-get-a-big-boost-.html
Future Impact
Although we’ve seen incredible increases to home prices, we’ve also been in a historically low interest rate environment. For the 30-year mortgage rate to be under 3% up until November of 2021 gave consumers a little more spending power in terms of the mortgages they took on. Yes, prices of homes we’re rising at a most likely unsustainable rate, but home affordability was in line as long as rates were low and someone could afford the extra down payment.
This feels like it’s about to change. Interest rates on the 30-year mortgage increased an entire percentage point in just over three months. On November 10th, 2021 the average rate was 2.9%. Today’s rate is 3.9%. Let’s take a look at the impact of these rate increases, as well as the effect on further rate hikes:
$280,000 Mortgage (Median U.S. sale price of $350,000, 20% down)
2.9% 30-year Fixed Rate = $1,165 / Month
3.9% 30-year Fixed Rate = $1,321 / Month (13% increase)
4.5% 30-year Fixed Rate = $1,419 / Month (22% increase)
$500,000 Mortgage
2.9% 30-year Fixed Rate = $2,081
3.9% 30-year Fixed Rate = $2,358 (13% Increase)
4.5% 30-year Fixed Rate = $2,533 (22% Increase)
$800,000 Mortgage
2.9% 30-year Fixed Rate = $3,330 / Month
3.9% 30-year Fixed Rate = $3,773 / Month (13% increase)
4.5% 30-year Fixed Rate = $4,053 / Month (22% increase)
In just over 3-months, the monthly payments of houses have increased by 13% for a house at the same exact price. Now given the recent volatility due to the conflict overseas, we’ve seen rates come off of their highs. I don’t ever want to be in the position to predict future rate movements, but given where inflation is today and the Fed’s mandate, it wouldn’t be a shock to see rates continue to move up. Another .5% movement up of the 30-year all of a sudden makes those monthly payments 22% higher than just a few months ago.
That’s not an insignificant amount, especially when prices seem to be holding steady.
Is this 2007 all over again?
It’s no secret that this housing market is the hottest its been since just before the housing collapse in 2007. This is a scary proposition for any potential buyer. A question we are asked often is how the current environment compares to 15 years ago. Obviously there are similarities in the rate of home value increases. There are also some significant differences which makes this housing market much different.
Looking back to the financial crisis of 2007, there was much more than rising housing prices that caused the market to collapse. The entire financial system was built on, let's call it, shaky ground. Banks we’re really the culprit in the situation, giving loans out to borrowers who never should have qualified for the mortgages they were getting. When these loans soured and banks we’re not properly capitalized, the house of cards began to tumble. There was a lot more to it than this, but our entire financial system was much worse off back then.
Since then, banks have solidified their balance sheet and continue to be much stricter when it comes to lending. According to nerd wallet, the FICO scores for home buyers today average 757 for the six months ending September 2021. This is well over 100 points higher than what would have qualifieid for best rates back in 2004-2006, according to the Washing Post. The share of Fico scores below 640 used to be around 25%, and now its less than 5%. Major changes in who qualifies for mortgages in this environment.
At the end of the day, there were many factors that contributed to the collapse of the housing market during the financial crisis. The fact that home prices were rising sharply was not the sole contributor. Both banks and borrowers were over levered and once things started to break down, it led to a larger collapse.
Todays housing increase is being driven manly by supply and demand. As you can see, with less inventory, prices have risen. The biggest factor helping to support these prices have been record low interest rates. The credit quality of borrowers and strength of banks haven’t been this strong in decades, maybe ever. Now most economic recessions or crashes come from reasons that are almost impossible to predict. But as of today, the strength of the economy is quite strong and factors leading to todays housing price increases feel much different than they did 15 years ago.
What should you be considering?
If you are like me, even with rising rates and rising home prices, you still want to find a place to call home. A permanent home not a temporary home. There are obvious headwinds as described above, but I want to share how I’m thinking about purchasing a home in this environment.
Priorities
In this type of market, it’s never been more important to be intentional about your home purchase. With most homes closing within a week, there isn’t much time to really consider each and every house. Doing the work ahead of time (location, intangibles, what’s important to you and your family) needs to be the focus. For my family and I, being in a new market (Boston) we are experiencing incredibly high prices. One of the most important pieces to us is our kids' education, so being in a strong school district is key. Community is also big on our list of priorities. We want to be in a community where there feels like there is a togetherness and closeness so our kids can be raised in that type of environment. Home size is less important as long as it's functional for three kids and a home office. We’d rather be out and about within the community than stuck inside. Be clear about these priorities and be intentional when looking for the right home.
Time Frame
Having your priorities ahead of time will help you make a longer-term decision with where you eventually end up. Given that prices seem to be going up exponentially, you need to make a well thought out decision on a home purchase in this environment. In the past I would say you need to be thinking about a minimum of 5-6 years in a home to make it worthwhile to purchase. In today’s market, I would say a 10 year time frame is key. The reason being is if by chance we do get a market pullback, due to rates or slowing economy, 10 years should give you peace of mind of not selling at a loss down the road. (I’m of the opinion we won’t see a market collapse, more of a “plateauing”)
Rent vs. Buying
Because of our relocation, we were forced to rent when we first arrived in Boston, unable to find a home to purchase. And you know what? I was totally fine with it! There hasn’t been a day that goes by where I think I’m wasting money. In fact, renting after owning homes for the previous nine years has been a relief. No worrying about maintenance, upkeep and most importantly this winter, snow removal. There’s a nasty myth that renting is throwing money away, and I couldn’t disagree more.
Now for me and my family, ideally I would like to own a home. It’s not so I can profit off of this market or stop “wasting money” on rent (again I don’t believe this). Owning a home for us is all about stability. Having a place to call home sets the stage for future schools, and building an environment that isn’t changing every year or two. Again, I don’t feel bad for a second renting in our current situation. But moving forward, having a home for the kids is a huge part of our priorities.
If you ever feel bad about renting, don’t! There is nothing wrong with renting if it fits your situation and lifestyle.
Cash flow & financial situation
There’s a few general rules of thumb for how much house you can afford. Obviously going through the mortgage application process takes many of these into account. One of the specific general rules is your home expenses shouldn’t exceed 28% of gross income. Whether this is the exact number, honestly who knows.
I don’t think you can make as important of a decision as a house is in today’s market with a focus on general rules. It really depends on your situation. Stretching yourself a little bit in this market if you can lock in low rates may be a benefit in the long run. It helps to work with an advisor in these types of situations, working together to know your situation but to also help make the best choice possible for you and your family.
Final Takeaway
If you are reluctant to buy in this environment because you’re looking at it as an investment and fear there may be a pullback, I’d be very cautious. No one can predict the future, but if you are holding off on buying hoping prices come down, you may be waiting a while. Prices may not fall from these levels. As the economy matures, more supply comes to the market, and interest rates rise, I don’t foresee the rate of increases continuing. Given the supply and demand environment, a price plateau or slowdown in increases is more realistic than a crash.
At the end of the day you need to make the best decision with the information you have in front of you. There are so many factors that come into play. In this environment you need to be more sure than ever of the home you may be buying. If you do the work ahead of time, get crystal clear on what you want, and understand your financial position, it makes choosing whether to buy or rent that much easier. It doesn’t mean its easy, but there is certainly hope!
Written by: Ryan Bouchey