According to the U.S. Census Bureau, homeownership in the U.S. had declined after the Great Recession and hit its record low, 62.9%, in Q2 2016. The past year, however, we finally started seeing some recovery. Homeownership sat at 64.2% in Q4 2017, 50 basis points higher than a year ago.
That being said, just because we started seeing more action in the housing market, it does not mean that you should just follow the trend. What if the housing prices are going to fall in the next couple of years? What if there is a housing bubble? Anything else we are missing? To find out if now is a good time to buy, we must look at interest rates, and of course, housing supply and demand.
Interest rates are on the rise, and what does that mean?
For those who are unfamiliar with how interest rates work, an interest rate is an amount charged by a lender to a borrower for the use of assets. For example, when you borrow money from a bank, you will have to pay the interest for the use of the money you borrow. Interest rates are determined by the 10-Year U.S. Treasury rate, expected inflation, and market risk premium. In the past 10 years (since the 2007/08 Financial Crisis), the 10-Year rate has averaged 2.6%, as the Fed focused on stabilizing and stimulating the economy.
In 2017, however, the Fed finally adjusted its monetary policy and started raising interest rates in response to the booming economy and historically low unemployment rate. As the 10-Year Treasury rate rises, so are the interest rates. What does it mean? A higher interest rate means less return on your investment as it increases the cost of borrowing. This makes homeownership more burdensome, as you would be spending more on paying back the loan. Meanwhile, housing prices might go down, a great news for homebuyers.
However, it does not mean that the housing prices will drop right away. Remember to factor in the time lags. While it is true that the market reacts and adjusts itself to monetary policy decisions, in reality, there is always a delay between an economic action and a consequence. In other words, we might need to wait for 12-18 months to see an actual drop in housing prices in response to higher interest rates. Meanwhile, we have started seeing traction in housing prices (thanks to housing supply moving into the market). It is safe to say that now is still a good time to enter the market if you are looking to buy a house this year.
How bad is the housing supply and demand, and will I be able to find what I’m looking for?
Eager homebuyers have been frustrated with low housing inventory over the past few years, and low inventory is one of the main drivers of the skyrocketing housing prices. But exactly how bad is the housing supply? According to the U.S. Census Bureau, in Q4 2017, the number of vacant units (for sale only) in the U.S. decreased by close to two million compared to a year ago, and meanwhile, 1.4 million units became occupied by owners.
Existing home sales and new home sales both reached their peak in Q4 2018, and now the sales are struggling to move higher, held down by lack of inventory and high prices. Buyers who are looking to buy now should start early in response to the lack of choice. Good news is that housing permits and starts are both increasing, showing possible housing inflow. However, keep in mind that there is also a time-lag when it comes to building a house – on average it takes at least one year from getting the permit to putting the house on the market.
We are still in a seller’s market, and due to scarce supply, most homebuyers might experience difficulties finding a house. The new tax law supposedly should balance the playing field between renting and buying, but at the end of the day, the housing market is still largely controlled by supply and demand. Interest rates, indeed, play a huge role, and so now is a good time to pull the trigger for people looking to buy. However, be wary that there might not have that many choices, and if you plan to secure a house in 2018, you might want to start now before more buyers enter the market in summer.