Should I Be Buying A Home Right Now During This Housing Bull Market

Hey, what's up, everyone, Henry here at Disruptive Money Management, and today's topic was requested by my dear friend Jack Bustamante. Before I dive into the subject, I want to thank you from the bottom of my heart to your fantastic listeners. When I started Disruptive Money Management, there is always that nagging question of whether the material would be of interest or even well-received. I'm incredibly thankful to each of you who tune in on the latest episodes and, more importantly, share feedback on interesting topics. I'm always striving to create content around topics that would be of value to you, and hearing from my listeners on what people are concerned about and trying to plan for really helps keep the content fresh.

So without further ado, today's topic revolves around the current housing environment that we are in. Part of what I want to address in today's episode is whether or not now is a good time to buy.

For those following the housing market or perhaps you're not, but you're considering a purchase, purchasing a home in current market conditions is proving to be extremely difficult. This type of housing market experienced is drastically different from just a year ago when home sales and home prices were steady but not extreme.

What do I mean by extreme? Well, a quick Google search on average home price increase returns many results:

• Reno median home prices break past $460,000 for the first time

• Houston home sales up again in August, but inventory falls to 5-year low

• Denver's average single-family home hits another all-time high

• California home prices break another record in July

• Demand for housing in Tucson far outpaces supply

• Metro Phoenix home prices hit a new record as home prices as bidding wars and sales soar

Here in Tucson, we're experiencing less than a 30 day supply of available homes for purchase. Homes are sold for over asking and entering into bidding wars. And as stated before, this is happening all across the country!

Interest rates are at the lowest point it has ever been inclusive of the 2008-2009 recession.

What is the cause of all this?

Well, whenever our country enters into a recession or recession-like environment, the Federal Reserve primarily has two types of ammunition to fight back, and that is reducing interest rates and increasing the money supply. 

In early March 2020, when we were neck deck in the COVID-19 pandemic, and the stock market was falling off a cliff, the Fed did just that. It did both. It practically took a rocket launcher to the problem and fired off two devastating blows to stimulate the economy.

Interest rates are at the lowest point it has been since coming out of the 2008-2009 recession. With interest rates at all-time lows, the cost of borrowing becomes absurdly cheap. I know of clients who are refinancing 30-year mortgages at 2.89%. New car loans are being advertised at 1.99%, and as you can see, the Fed efforts of decreasing interest rates to stabilize and stimulate purchases are working.

Again, home sales are at record highs this year, and we see that sales volume has increased by over 10% in many parts of the country for August. When home sales are high, and inventory is low, it inadvertently increases home prices. Going back to Economics 101, prices are set by supply and demand. If the number of buyers is much higher than the amount of the commodity, prices inherently increase.  

It's interesting to note that many parts of the country, especially those not in major metropolitan areas, are undergoing bidding wars. Coming from San Francisco, it was not uncommon, and in actuality, it was expected that when a home was listed for sale, it would automatically generate a bidding war. Bidding wars are expected at very high cost of living cities with high economic growth. Still, now, this is being translated over to the medium cost of living cities and even low cost of living cities. The work from home ability that is being presented has questioned the reason why families are staying in major cities. I mean, let's be realistic, you don't stay there because of the long commutes. You don't live in San Francisco or Los Angeles because you enjoy paying $6 bucks for a latte or $20 for a craft cocktail. You do it because the high paying jobs are there. 

But with more and more companies shifting their workforce to being completely remote, the allure of relocating to a moderately priced city with a lower cost of living is becoming extremely attractive for many families. 

Small Business Trends published an article back in June that stated that about 2/3rds of 67% of businesses that have adopted work from home policies expect to maintain these policies long-term or permanently. Tech companies such as Twitter and Facebook have adopted guidelines for permanent work from home. Nationwide, one of our country's largest insurance companies is backing out of commercial real estate holdings because they no longer see the need for that much corporate real estate now that they have adopted permanent work from home policies for a significant number of their workforce.

So what does this mean? It means that the modern-day workforce, predominantly attracted to economic growth areas, is now refocusing towards micro-cities and smaller metropolitan areas. 

The shift towards work from home will have lasting consequences on major metropolitan and smaller cities as millennials become less attracted to areas of high growth and more attracted to communities with affordable housing and lower cost of living.

In the short-term and I think this will continue for the next 24 months, we will see interest remain low. There might be some tapering upwards because the idea of seeing mortgage interest rates further decrease is difficult to fathom but then again, who would have thought rates would drop to 3%. However, it's unlikely that the Fed will increase interest rates while still facing a health crisis. Economically speaking, we are at a very delicate balance right now. A tilt or swing to one side of the equilibrium can very quickly dismantle the entire system. 

If you're sitting on the fence wondering if you should purchase a home now or wait for prices to decrease, I urge you to consider your reasoning on why you want to buy a home. What I mean is this: homeownership isn't meant for everyone. We all go through various life stages when purchasing a home doesn't make sense. Perhaps you're just a few years out of college, and you're adventuring between places until you settle down. Maybe you're considering buying a home now because interest rates are low. Your renting cost is already comparable to a mortgage, so you're questioning if purchasing a home now makes more sense financially. 

I always suggest that if you cannot see yourself in the home for at least five years, then perhaps it is not the right time for you to buy a home. The high upfront cost of purchasing a home in an extremely competitive market means you are at an increased risk of being underwater if we enter into a correction, and you need to sell the house. 

What I mean is this, if I take you back to 2007, mortgage interest rates were at an all-time low. I remember my parents buying their home in 1999, they closed in December, and we moved the first week of January in 2000. Looking back at historical data, interest rates at that time were at 8%. Eight percent! Can you believe that? Through the years immediately after 2000, interest rates were still in the 7% range, and after September 11, the Fed decreased interest rates because of the attack on the Twin Towers. The markets were tumbling, and consumer confidence was low, so the Fed stepped in by reducing rates to stabilize the economy. Interest rates at that time went from 7% to 6% within a matter of a year. It subsequently went below 6% but ultimately stayed in the 6% range through 2008. 

I bring this up because when we look back at what led to 2008 and 2009, interest rates were kept low, low for the standard at the time, which spurred home sales and dramatically increased home prices. When the recession of 2008-2009 occurred, the market was flooded with inventory from foreclosures, and within a matter of months, homeowners were instantly underwater. The price that they paid for the home leading up to the top of the bubble instantaneously evaporated, and they ended up owing more money on the house than what was worth. 

From the clients that I worked in 2012, many were still suffering from being underwater on their mortgage. It was either file bankruptcy, walk away from home, or stick with it until prices increased.

Now, I'm not saying we're entering a situation reminiscent of 2008-2009 but having a higher-priced home going underwater to become solvent again took almost five years.

Which leads me back to my point that if you're not intending on staying in the home for at least five years, I suggest you wait before jumping out there to buy a home. Unless you're coming in with a sizeable down payment to reduce your monthly mortgage obligation, its very likely that in today's market environment, you will be paying a high price for a home, which may become very difficult to sell if there is a correction. Additionally, if your fall-back plan is that even if you can't sell it, you should be able to rent it, you ought to consider whether the market you want to buy in can bear a rental price that meets or exceeds your monthly mortgage payment.

The last thing you want to run into is buying a home for the short term because renting is the same. I'm telling you that it is not. The math is that you're borrowing for every $100,000, you'll pay roughly $425.93 for principal and interest. So, for instance, if you're buying a $250,000 home, your cost to carry is $1064. But if you're not coming in with full down payment, you're going to be subjected to PMI or private mortgage insurance, which is half a percent to one percent of the outstanding loan amount. You'll also have to factor in homeowners' insurance and property taxes. When you factor all that in, you're sitting pretty close to $1600 a month for that $250,000 home. If your area doesn't justify that amount's rental prices, you'll still be cash flow negative if you have to move out and rent it. 

Buying a home is designed to be a long-term investment. I am a big advocate that owning your home is the best path to financial freedom, but you ought to do it when it makes sense, and it is a home that you can envision seeing yourself in for the long-term. I want to end with this question: 

Owning your home is a crucial step towards financial independence. You do not want to be stuck a renter with a lifetime of payments in retirement. However; purchasing a home should be considered a long-term investment. If you’re thinking of moving within the next 5 years, it may not make financial sense to purchase a home.

If home prices tumble in two or three years to the point where you cannot sell the home because the outstanding debt exceeds the home's value, are you OK with staying in that home for an indefinite time until the home value equates the debt?

If your answer to that question is not favorable, then perhaps it's better to remain on the sidelines for now.

And that's it for today, my friends. As always, I hope you enjoyed this episode. Please share with your friends and family if you found this episode of value. If there are questions that are just burning your noggin, drop me a message, and perhaps I can create an episode around it.

Until next time, I wish you all a very productive rest of your week. Stay safe, stay healthy, and make these days of your life the very best days you possibly can.