I don’t envy people who do not own a home at this point, it rarely feels like a good time to buy especially if you live in a major city, almost anywhere in the world. But honestly how something feels is probably not the best way to decide your financial future. When everyone is piling in and excited and it feels like the “the right time” there is a good chance it is actually the wrong time to buy, and that is true for most investments. So is right now the right time to buy a house feelings or not? How should we think about this?
Housing is just like anything else, it follows the laws of supply and demand. Understanding what influences the supply and demand of housing can help you get an idea of when a good time might be to dive in. Here are some major contributors…
Interest Rates: Interest rates are a major driver of housing pricing and demand, because most people take out sizable mortgages the cost of that mortgage has an outsized effect on the housing market. When interest rates are low, say 3% borrowing $100,000 for 30 years costs about $420 a month, when interest rates go up to 6% it would now cost $600 a month. That is a huge jump in cost, and given most people are stretching to buy their homes it can be a deal killer for lots of buyers meaning that demand for housing goes down. Prices need to go down to make up for the additional interest costs. Right now this is a major effect on the market, housing takes a long time to reflect what is happening, it is not like the stock market, so the recent increase in interest rates will not be seen in the numbers for a little bit longer.
Physical Building: There are times when companies and people build lots of houses and times when they don’t build a lot of houses. This happens do to costs and prices in given areas, the regulations in a market and other factors, but bottom line is, if lots and lots of houses and apartments are being built in an area chances are the prices will remain muted or possibly go lower over time. This is what happened in the financial crisis, the US and many other developed countries just started going crazy building new houses because the prices were going up way above what it cost to build the houses.
Population Movement: Tied very closely to the building of the houses is the number of people who want to buy a house. People wanting to buy a house can come from many sources, you can have immigration into a country or area that drives demand, you can have natural population growth where kids just needs to move out of their parents homes, you can also have speculative and investment driven demand where people want to have two homes, or if its a vacation spot people see the need for homes to rent to people visiting.
Incomes: This is another major element of housing, as people’s incomes naturally go up over time due to inflation and productivity gains in the economy more money is available to spend on housing. Housing is a natural beneficiary of a growing economy because as people grow richer one of the main things they want to spend their extra money on is nicer housing. In the 1950’s US homes averaged about 950 sqft, in more recent times the average new house is 2500 sqft! People may have gained weight during that time but they haven’t gotten that much bigger! 🙂 This aspect of income is a really key thing to understand. On one hand this aspect of housing is what allows it to be an inflation resistant investment, if inflation is rampant in an economy people will have more and more nominal income to spend on housing which means housing goes up to reflect inflation. The other thing to understand is how expensive housing is compared to the average income in an area. If housing is super expensive compared to income that is probably a good indicator that the risk of house prices dropping is bigger.
So with those four elements is now a good time to buy? Well that really depends on where you live. If you want to look at the US overall, Interest rates have gone up a whole lot over the last few months that is a big negative suggesting now is not a good time to buy. In addition prices compared to incomes overall are quite high, another knock against buying. BUT the population is still growing and building has not kept up with demand so there are some big long-term positives there at least when it comes to pricing. There are many advantages to owning a home besides the price going up, but being underwater on a house is not a good feeling, believe me I know. If you’re thinking about buying right now, take a look around at your local market given the info above and then decide if now is a good time or not.