(Supporting charts and data referenced herein are included as an Appendix to this snippet)

In the past few of weeks, many of you reached out to get my thoughts on whether they should buy a home now or wait. The economy and rates are certainly top of mind for many … thereby making the decision even more difficult to make.

Despite rising interest rates, which one could argue keep many buyers on the sidelines, housing prices remain elevated. Why?

One reason for this is the low housing supply. The same high interest rates are also making new construction more costly, causing builders to pause.

What would trigger builders to add more inventory? Lower financing cost (lower rates), availability of credit, and higher consumer confidence in the economy.

In addition, the unprecedented low rates in 2020-2021 resulted in a large share of homeowners refinancing existing mortgages. According to prnewswire.com, about 62% of mortgages in 2020 were driven by refinance activity. Holding debt at 2-3% fixed rate when inflation is running between 5-8% is an asset. The now higher prices (when compared to 2-3 years ago) coupled with high interest rates, are keeping homeowners who might have otherwise considered to sell, on the sidelines.

What would trigger such homeowners to sell in the current environment? Beyond market conditions and higher consumer confidence, a major life event (such as lay-offs, the need to cover unexpected or large healthcare expenses, moving away to care for ailing family or be closer to aging loved ones, death, etc.).

Based on review of past recessions, it takes on average 2 years from the Fed Funds Rate peak point for the unemployment rate to peak. The latest Fed meeting in 5-2023 suggested that the Fed will have another hike (or two) before they pause for a while (vs. lower rates). However, for how long and at what degree of certainty remains to be seen. It further intimated that they expect unemployment to hit 5% next year, supporting the historical lag observation above (although the time period may be different this time as a number of people who exited the workforce during CV19 did not return and job openings currently continue to exceed the number of workers).

The National Debt is currently at ~$32TN. High interest rates are creating a large debt service burden, which exerts pressure on the Fed to lower rates eventually. The upcoming elections may also impact decision making. However, all would depend on whether inflation continues to fall, if the economy is in pain (read high unemployment) before the Fed reverses course. It takes a lot to get inflation from the current rate of 3.0% to the Fed’s target level of 2%.

To make matters more complex, real estate is regional. Thus, the impact on demand, supply, prices, and affordability will vary by market (the charts in the appendix below are at the US national level but the data sources we used have regional level data).

So should I buy a home now or should I wait?

As usual the answer is: “It depends.”

If your plans to hold the property are short term to medium term in nature (1-5 years so), you might want to wait a little longer for prices to stabilize (from a few months to a year or so). While waiting, you might also want to consider other investment opportunities that generate cash flow and build that income stream to fill the liquidity bucket, which you can later deploy in making that first purchase (we discussed some of those in our prior snippets or you can reach out and we can review these options together).

Otherwise, if you plan on holding long term, “marry the house and date the rate”. Residential mortgages usually do not have prepayment penalties, making it easier for home owners to refinance at a lower market rate. If we assume median home price declines by 20% (magnitude similar to the one during the Global Financial Crisis, which took about two years to bottom out) from its peak of $500M, the new baseline will settle at $400M. Whether that will occur is a whole separate topic. [The fundamentals of low housing supply, mortgage rates settling in at historical 5-6% (vs. the 2-3% rate) especially given the Fed’s desire to keep inflation over 2% at bay, and low level of trustee sales/distressed properties do NOT suggest that price crash will occur in the residential space.]

I usually do not like to speculate and I do not advise anyone to time the market, as I myself do not usually do so. And so I will share a personal story.

This reminds me of my first home purchase back in 2005, which I sold in 2007. Some would have argued I should not have bought and sold close to the peak (hindsight 20-20). And some may wonder how I even timed this. I did not time the market or try to time the market….I had no idea the world will fall apart and the housing market will crash in late 2008-2009. I had bought that home as a short term investment with the goal of generating higher returns than having cash sit in the bank and covering some of my grad school tuition. While the sale price I finally settled on was not in the top tier of my personal target, it still generated a decent 15% profit, enough to cover a substantial share of my graduate school expenses (which is what that home was intended to do). I distinctly remember the thought that ran through my mind despite the emotions felt at that time of sale: “Do not be greedy.” In retrospect, I am glad I moved forward with the sale because if I had not done so and gotten caught up in lengthy price negotiations, I would have lost money on the home and possibly even gotten foreclosed on, given what unraveled just a few short months later. It took almost 10 years for the price of that home in that particular submarket to come back up (again, remember – real estate is regional).

I also remember when I purchased my current home back in 2016. There was a lot of talk at the time about the coming crash. As my goal this time around was to purchase it as a long term hold, I moved forward with the purchase vs. trying to wait, speculate, and time the market. My rent payment at the time was also getting higher than the mortgage cost, which made the financial decision easy for me. The housing crash that everyone was talking about never came. That home has since appreciated by 50% (even with the recent softening in prices). Current market rents are higher than my current mortgage payment. Needless to state, had I waited, I would not have been able to afford the down payment and would have had to save quite a bit more, thereby potentially putting the dream of homeownership on hold.

Thus, the answer to this million dollar question really depends on your personal financial position, individual financial goals, your intended hold period, the investment alternatives available, and the submarket where you are considering to buy.

We hope this snippet generated food for thought and provided helpful data points you can track (in the appendix below), so you can make an educated decision when the time is right for YOU to make that home purchase.

Should you have any questions or want to learn more about real estate investing or for an overview of our target markets, please reach out to info@dbacapitalgroup.com.

Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.