A May 2022 Gallup poll found that a record low 30% of Americans believe now is a good time to buy a home. More than double the amount of Americans said that it was a good time to purchase a home just a few years ago. What’s changed, and should you still buy a home in today’s housing market?
The Current State of the Housing Market
According to the St. Louis Fed., home prices have been up by more than 33% since the start of the pandemic. In 2021, the nationwide median home value rose 16%, according to RealtyHop’s recent study. Because of the rapid increase in prices, housing affordability is almost worse than ever. This May, 90 out of 100 of America’s largest metropolitan areas experienced month-over-month appreciations.
High interest rates make taking out a mortgage even more financially burdensome for prospective homebuyers. At the end of December 2021, the average interest rate on a 30-year fixed-rate mortgage was 3.11%. As of May 12, it’s 5.3%, representing a 70% increase in just over five months. Because of the staggering rise in home prices and interest rates, many Americans who could have previously been able to purchase a property now can’t afford to buy even a starter home or fixer-upper even if they wanted to.
Why are Home Prices So High?
Black Knight reports that as of the end of April, the payment-to-income ratio on an average mortgage payment was 32.5%, the worst since 2006, the height of the housing bubble. The untrained observer may assume that the current housing market is a bubble, but conditions are very different today than they were prior to the 2008 Financial Crisis.
The previous housing crisis was primarily a result of unsustainable lending practices from financial institutions. Those lending practices and inconsistent reporting contributed to the housing price bubble, as the constant swapping of mortgage bundles inflated each bank’s expected financial return. Banks then made investments as if they already had that larger amount of money, further causing the bubble. Today’s housing crisis is primarily a supply issue and a consequence of high inflation and rising costs across the board.
A 2021 National Association of Realtors study found that America was short around 6.8 million homes. To fix the housing shortage, the United States would have to build roughly 2 million homes a year for a decade, representing record annual production levels every year for ten years. To put it bluntly, the U.S. has a shortage of homes, and the crisis won’t correct itself for a long time even if immediate actions are taken.
The United States could build 2 million housing units annually for a decade and still face a housing deficit, leaving home prices too high. The current severe housing shortage is evident when looking at the number of active listings. According to the St. Louis Fed., there were roughly 409,000 active housing listings in April 2022, down from about 1,024,000 in April 2020.
There are signs that the municipalities and developers are working together to address the housing shortage. Despite falling short of what’s needed, City Signal reports that housing starts are 22.3% higher than the previous year. The Biden Administration also released a plan on May 16 that is intended to close the housing supply gap within five years. The plan calls for rewarding municipalities with ambitious zoning and land use policies, new financing methods, and more. But the plan will have little to no effect in the coming months or year.
How is Inflation Impacting the Housing Market?
In April 2022, annual inflation was 8.3%. Everything is more expensive, which impacts housing costs. As the cost of producing and transporting goods necessary for homebuilding rises, building houses becomes more expensive for homebuyers, causing a rise in prices. Of course, prices wouldn’t rise if there weren’t enough buyers able to afford a home, but the cost of goods and inflation can’t go ignored.
For example, the price for a 1,000-foot board of lumber was around $340 in May 2020. It skyrocketed over the coming months, peaking at nearly $1,700 in May 2021. Even though it came down substantially, the price is now at $780, significantly higher than pre-pandemic levels. The high cost of goods, along with a labor shortage and supply chain disruptions, make building new housing a more expensive, challenging, and lengthy process.
So is Now a Good Time to Buy a House?
If you can afford it, buying a home in today’s market may make sense. With mortgage rates rising, you may benefit from securing a deal before they grow higher. Or, you may benefit from waiting to see if there is less competition years, or even months, from now.
Why It May Be Good to Buy Now
Your decision on whether or not to buy depends on your current situation and goals, according to Chris Herbert, the managing director of Harvard’s Joint Center for Housing Studies. “You ought to be making this as a housing decision and not an investment decision. The longer you stay in the house, the [less] your timing in this particular house-price cycle [will] matter”, Herbert told the Atlantic. According to Herbert, if you’re buying a house, it should be because you want to live in it for at least five years or more, as there is a virtual guarantee that the home will appreciate over a long period.
If you can afford a home, making a purchase can be a good financial decision, even in today’s housing market. Rents have been on the rise across the nation, especially in major cities. In Boston, the median rent for two-bedroom apartments rose 19.5% year-over-year, according to RentHop. Meanwhile, rents in New York City have surpassed the pre-pandemic levels, meaning housing costs are drastically higher for renters as well. If you delay purchasing a home, consider the cost of paying high rents.
Other experts caution that waiting for the housing market to dip isn’t a realistic strategy, as prices are unlikely to fall, and interest rates are likely to stay high for the foreseeable future. If you can afford to buy a home now and want to become a homeowner, it doesn’t make sense to put off the search for a year, but others may want to build up their finances a bit before submitting offers.
“There’s not going to be an optimal point when prices dip and you can jump in,” according to Jenny Schuetz, a senior fellow at the Brookings Institution. She said that if you are financially able to purchase a home, now seems just as good a time to buy as a year from now.
With increasing mortgage rates, it may be best to seize a deal now to avoid a higher rate in the future. The average interest rate on a 30-year mortgage reached 5.0% in April, and there is no strong data that predicts whether the rate will increase or decrease over the next few months. If you are worried about rising rates and getting priced out of the market, it could benefit you to purchase while you can afford to.
Why It May Be Good to Wait
Schuetz does caution against taking a bad offer on a home just to complete a purchase. While it may not seem realistic, it may be better to pass on an opportunity if the terms are less than ideal. If you cannot see yourself living in the home for years to come, it may be best to wait until something you are passionate about comes along.
According to Schuetz, “If everybody else is buying in a frenzy, that doesn’t mean you should buy in a frenzy too,” she said. “Some of the people who win those bidding wars may not have made good decisions.”
If you are not deadset on purchasing a home at this moment and instead considering buying a down the line, Freddie Mac’s recent data confirms that might be a wise decision. Their quarterly forecasts suggest that while the housing market should remain steady for the next few years, they anticipate that housing sales will slow to 6.7 million this year and 6.6 million in 2023, 200,000 sales less than in 2021. Overall decreasing the level of competition you might face when going through the purchase process.
Many current buyers will have to settle for less than ideal housing situations as prices skyrocket. Concessions, such as less space, a smaller yard, or one fewer bedroom, may allow buyers to purchase a home in their price range — and avoid paying astronomically high rents.
In any market, it makes sense to hold off on buying a home until you are confident in your financial situation. At the moment, waiting and saving more money for a larger down payment could help you partially offset the eventual cost of higher interest rates. Additionally, you could use the spare time to work on raising your credit score to qualify for a better interest rate.
Pay Attention to these Economic Indicators
When determining whether it’s a good time to buy a home, you must consider key economic indicators. Here are some economic indicators that may help you better understand the current economic cycle and make an informed decision.
Hosing starts are a leading indicator. When housing starts go up, builders expect the demand for newly constructed homes to go up in the future. In contrast, when the number falls, it reflects that builders are more pessimistic about the future and expect that the demand for new homes may drop soon.
Economists and investors pay close attention to housing starts, as sustained decreases in housing starts indicate that the economy is likely entering a recession. Meanwhile, upward trends in housing starts show that the economy is growing strong. For prospective homebuyers who are sensitive to market conditions, housing starts will provide information about whether or not to purchase a property and how much supply of new homes would potentially hit the market in the next 12-24 months.
Interest rates are considered a lagging economic indicator, and they have a significant impact on the housing market. Higher interest rates mean higher monthly payments and, therefore, may reduce housing demand. On the other hand, when the Fed slashes interest rates to boost the economy, housing demand increases as homebuyers try to secure a favorable interest rate.
As you start your home search, pay attention to how the rates fluctuate. If you expect the rates to continue to go up in the next couple of years, you may want to consider a 7/1 or 5/1 adjustable-rate mortgage (ARM). ARMs have lower mortgage interest rates than fixed-rate mortgages and could save you hundreds of dollars per month on just interest payments.