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  • Writer's pictureNate Baim, MBA, CFP®

"Should I Buy a House in Today's Market?"

Enjoy this week's edition of the Planner's Beta

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Video Transcript:

Today's housing market is crazy. And if you're somebody who's considering buying a home, you probably are asking yourself, "Should I buy a home now?"

In today's video, I want to provide you an analysis of the current market and a framework to assist in your purchase decision.

Looking at the S&P Case-Shiller Index will help us understand the price movement of homes in recent history. The Case-Shiller index is an essential measure of national housing prices. It is composed of housing prices from 20 cities.

The housing market today is different than what it was in 2007. Post the Great Financial Crisis, home prices declined 34%. But prices have recovered 85% since their lows. Home prices have continued to rise past the housing bubble highs as many folks seek a home during a supply-constrained market.

The housing crisis is a painful memory for a lot of folks. It was a sad time. And many potential home buyers are reflecting on that experience. Many millennials experienced the pains and anguish of the housing bubble burst firsthand or through a family member or friend. However, many folks are falling prey to recency bias. Recency bias is where we use a recent series of events to inform our decisions today. The pain of the GFC is still fresh in our memories, and it is influencing our choices today. The fear is justified, but we need to evaluate today's market to make informed decisions. Let's look at the supply and demand data to better understand the current market.

Let's first look at the supply side of the equation. One of the places that we can begin to understand supply is by looking at the month's supply of inventory. On average, since going back to the 1990s, the monthly supply of housing inventory was almost six months. Currently, nationally, we're at 5.1 months. We can also see that that current level is lower than the average, and it's much lower than the inventory levels leading up to the bursting of the housing bubble.

It is also important to point out that this low amount of inventory should be an encouraging signal to builders. And we can see some positive signs in the number of housing starts. We can see that housing starts were significantly lower from 2010 to 2015 than during the mid to late nineties. And this leads me to believe that there was a significant undersupply of houses before the pandemic. We can also look at the housings starts data for single and multifamily units. When we look at multifamily units, there's not been so much variation in that market. Still, with single-family units, we can see that the number of starts has been low post the financial crisis. And until recently has single-family units started to approach its average housing starts seen in the nineties.

We can also see that housing starts slowed at the pandemic's onset but has increased significantly due to strong demand. And with such limited housing supply and continued demand from low interest rates, housing starts may continue to rise as builders seek to keep up with demand.

Now let's talk about interest rates and the demand side of the housing market equation. Since the nineties, mortgage rates have been declining. And we can see that on average, since 1990, mortgage rates were 6%, but today interest rates on 30-year fixed-rate mortgages are about 3%.

Low rates decrease the total cost of owning a home. In other words, less of your monthly payment is going towards interest, and buyers can have more money go towards principal expenses for a larger home. Or, with lower rates and thus lower monthly payments, buyers can purchase larger homes with less capital. Ultimately, lower rates allow more people to enter the market because more can afford the mortgage payments. These lower rates spur additional demand.

Another item to look at on the demand side is by looking at housing affordability. In this graph, we can see the home price to median household income ratio. The higher the ratio, the more expensive home prices are relative to income. The data here is a bit old (there is a lag in the data to create this chart). But we can see as of 2019, house prices were high relative to the 90s, but not as expensive as the period leading up to the housing bubble. Anecdotal evidence suggests that over the past year, this ratio has increased. And I would not be surprised if we see an increase in the ratio after the data becomes available. If housing prices become too expensive, and incomes can not support these prices, demand could soften, and so too could the home prices.

Let's summarize some of this data we've investigated, review anecdotal evidence, and compare today's market to the last housing bubble.

On the supply side, during the housing bubble, we can see that there was excess inventory. There was builder exuberance characterized by increased speculative construction. We can see this in the extra housing starts and extensive home inventories.

In 2021, we can see that there's limited inventory and inventories. We can see in the data that the number of housing starts is significantly muted compared to what it was in the mid-nineties. There's also a lot of hesitancy from builders because they don't want to experience another housing bubble. This led them to be conservative in planning home starts at the beginning of the pandemic. An episode of the Odd Lots with Ali Wolf goes into great detail, and I encourage listening to the podcast.

Let's look at the demand picture leading up to the housing bubble. Interest rates were starting to increase, which led holders of adjustable-rate mortgages to default on their loans. These defaults led to foreclosures and contributed to the oversupply of homes on the market. Lax lending standards are often cited as a key culprit in the housing crisis. Many loans were forwarded to individuals who had low creditworthiness. And when interest rates started to move, the interest rates on adjustable-rate loans were adjusted up, increasing the loan's monthly payment. These hikes resulted in a situation where the borrowers could no longer afford their loans, which lead to loan defaults and foreclosures.

Today we have historically low rates. There's little indication that rates will rise significantly in the near term. However, if inflation becomes persistent, this may no longer remain true. If interest rates increase significantly, the housing market may cool down.

We also live in a world where we learn from the lessons of the housing bubble. One of the critical pieces of legislation from the financial and housing crisis was the Dodd-Frank Wall Street Reform and Consumer Protection Act. And inside the act, there were standards and regulations to limit the financial system risk and improve lending standards and consumer protections.

Finally, I want to discuss housing affordability. Yes, housing prices seem expensive. And it is painful to be outbid by competing buyers. And when we look at the ratio of housing prices to median income, we can see that that ratio is approaching the housing bubble's value. Using this measure, housing prices are only slightly more affordable today than they were, leading to the housing crisis. Now that may not stay true for long, but that's where we see the data today.

Looking at the national data (and local economies may be different), we can see today's economic environment is vastly different from 2007. What does this mean? As a financial planner, I can continue to digest the data differently or find new data points. However, it will likely not make your decision any easier. This is why I recommend folks not to ask themselves, "Should I buy?" but to ask, "Can I afford to take the risk and buy?"

It's easy to get caught up in the emotions of buying a home. I think it's essential for all home buyers to have guardrails put in place ahead of time to help them stay on their path. This strategy should be used in both a seller's market or a buyer's market. The strategy used by buyers should focus on managing risk.

These are the key points that I would encourage folks to consider who are looking into buying a home.

First, you should determine if the home that you're looking at fits inside your other goals. Are you ready for the lifestyle change of owning a home? A home is very different from an apartment, and you take on new risks and responsibilities.

Next, you should ask yourself how long you plan to stay in the home. Once you know how long you wish to remain in the house, perform a rent versus buy analysis. There are many great calculators out there. You can also use a financial planner to help you complete this analysis. If you plan on purchasing and moving within a short period, it may make sense to rent. Renting enables you to avoid irrevocable costs associated with buying and selling a home in a short time frame. Generally, the longer you plan to live in the house, the more likely it will make sense to buy.

Next, I encourage you to reflect on your income stability. If you're planning on changing jobs or are concerned about your job security, it now may not be time to buy a home.

Buy a house you can afford to live in comfortably. Don't dedicate such a large portion of your income to housing that your no longer have flexibility in your budget. I generally encourage the total cost of owning a home should be no more than 25% of your gross pay. This total cost should include your mortgage payment, taxes, insurance, HOA fees, and maintenance. And the lower your housing costs as a percent of your pay, the better.

Next, never use your emergency fund for a home purchase. After you've purchased the home, you should still have three to six months of essential living expenses saved in a high-yield savings account. It is going to be tempting to use these funds to buy a home. Don't.

Buying a home is an exciting and stressful experience. There is a lot to remember. I made a free resource to help you navigate your home purchase and cut through the confusion. You may visit to access a 28 point checklist of the necessary items you should consider before buying a house.

Subscribe or follow and for future videos. Thank you.


Have something on your mind? Schedule a free call with Nate.


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