When it comes to America’s housing market there’s one thing that everyone can agree on: no one needs to read another article on how hot home prices are or how the pandemic accelerated the current residential real estate boom.
Weighing far more heavily on most buyers’ and sellers’ minds right now is how high comps can climb, how long they’ll be priced out of the party, and whether it all amounts to a bubble that has the potential to pop and bring the whole dance to a screeching halt.
Real estate analysts from websites like Zillow, Redfin, and Realtor are all over this kind of stuff every day, publishing weekly reports on the number of home closings, sales averages, and which markets are the hottest. As a result, there’s never been a time in American history when home buyers and sellers have been more informed as they are now on when to sell, where to buy, and whether to move.
Notwithstanding all of the intelligence access, however, there’s never been a time in U.S. history either when Americans have been more willing to throw down more of their hard-earned savings more cavalierly sight-unseen on homes that they know are overpriced—frequently forced into all cash offers with no contingencies—against all of their better judgement just to get in on the action.
All of which begs several long-term economic questions when it comes to the American housing market, which including home renovation, building supplies, and other related industries accounts for more than 15% - 18% of average annual U.S. GDP: When exactly does irrational exuberance begin? How distortive and inflationary is panic buying ultimately to current real estate valuations? And how long will it take for the temperature to cool?
More importantly for today’s prospective homebuyers (and I am one of them, again) the current housing boom raises a far simpler question about when the point of buyer’s remorse begins and rationality ends.
According to many realtors and brokers—several of whom I spoke with can’t even find properties to list—that point already has passed. Which means that there are several very logical reasons to pump the breaks on buying a house in the current environment and wait until the froth subsides in order to get the most for your money when more inventory hits the market later this year while still taking advantage of what will almost certainly still be historically low mortgage interest rates.
Buying a home can one of most rewarding, life-changing parts of the American Dream. It’s also for most people one of life’s most expensive, disruptive, and time-consuming purchases that doesn’t have much room for financial error unless you’re so rich it doesn’t matter how much you could lose.
So for anyone on the fence right now thinking about buying a home, here are five reasons you’re probably making a sound financial decision sitting it out for the time being and pouncing when actual housing prices fall more back in line with real value.
Don’t Overpay
This one might seem so obvious that it’s not worth mentioning but it’s actually more complicated than it seems. Sometimes buying super expensive, seemingly over-inflated assets is still a money-making enterprise. Millions of people bought Apple and Amazon stock “high” years ago, the press mocked them for over-paying, and they still made truckloads of money anyways.
When it comes to the current real estate market, the juries are still out on whether current buyers are setting themselves up for disappointment. While most experts agree that the current housing boom bares little resemblance to the frenzy preceding the Great Recession in 2008, prices across the country are unequivocally overheated—up 16% - 20% overall Y-O-Y according to most indices, the highest rate of appreciation in decades.
Yet, that doesn’t necessarily mean that housing prices are going to crash, or even fall at all. What they’re not going to do according to most economists is keep appreciating at their current rate. That means anyone who’s buying now is getting into the game at the top of the curve with less room for making money over the long-term.
If you, like me, look at your home as an investment (particularly with no capital gains tax after two years) and not just a place to live, the cheap money now might be worth it on a monthly basis if you love the house that you can afford to buy, but the locked up capital might not pay off in the long term.
Additionally, as mortgage rates rise (which they will), homebuilders get back up to speed (which they already are), and the pandemic continues to wane, more previously reluctant sellers who were unwilling to move during the pandemic will put their houses on the market and inventory levels will increase.
What that “stabilization” means for home prices is anyone’s guess. But the chance that tens of millions of newly minted homeowners could be house-rich, cash-poor post-pandemic over the next few years is real and could have long-term impacts on everything from consumer spending to travel.
Don’t Settle
With so few homes available on the market right now and prices sky high, most homebuyers are finding themselves forced to settle—looking in neighborhoods they never wanted to live in or over-extending themselves to buy smaller houses for more money that don’t suit their lifestyles.
Settling might seem like a good decision now while real estate’s current equity is hot. But the other thing about homes is that we also tend to live in them for longer than we expect and circumstances, life choices, and things like babies usually happen when we’re least prepared.
Homes in their best-case scenarios are (or become) direct extensions of ourselves, where and how we want to live, and the communities that we want to create for our children. Since the pandemic began, however, people have been buying houses faster in more unknown places with less information than ever before. That means millions of homebuyers already have bought properties that they never had the proper opportunity to test drive before they decided to upend their lives and move in the first place.
Translation: If you don’t absolutely have to buy something right now because of a life change, that might be your best news in a while. You’ll have far more homebuying options at more reasonable prices under less pressure six months to a year from now.
Don’t Lock Up Your Money
In retrospect, the whole concept of a NINJA mortgage (no income, no docs, no assets) pre-Great Recession should have looked disastrous from a mile away to anyone who was paying attention. For buyers (and speculators and investors), however, it was free money with minimal risk and no skin in the game.
This boom time around the entire real estate buying landscape has been inverted. Buyers in many markets are being forced to put up to 40% - 50% down which in the case of many first-time homebuyers can wipe out most if not all of their savings with the stroke of a Docusign. In markets like Miami and Austin, buyers who can’t compete with all cash, no contingency offers often don’t even get invited to the table.
If all of this real estate forth seems financially illogical, it is. Stock market indices have been breaking all-time highs for years now through two Presidential Administrations and private equity firms and hedge funds have been posting 25% returns for a decade so there are better ways to invest one’s savings than tying it all up in a house.
Additionally, particularly for first-time homebuyers, throwing everything down on a mortgage can leave many owners without an emergency fund and depleted of the money needed to pay down other debts, prepare for unexpected repairs and maintenance, take advantage of other investment opportunities, or absorb sudden unappealable property tax increases (which happened to us twice in Philadelphia in two years adding more than $600 to our monthly mortgage payment).
Don’t Feed The Bull
Markets and stocks don’t “get” frothy or overheated on their own. People, including frequently investors, make them that way (hello GameStop). At the same time, the longer people froth over something they think they have to have the more sustained, and often irrational, bull markets become.
Real estate is no different, except that it’s an investment in which we actually live. Right now there are real issues of scarcity in the housing market, and prices are increasing in part because more people want to buy homes right now than there are properties currently available available for sale.
But that’s only part of the story. At some point last year during the height of the pandemic, emotion took over. All of a sudden millions of people wanted more space, less density, and greater security at the same time and they were willing to pay whatever they had to in order to make that happen.
It’s hard to say how much of the current 16% - 20% Y-O-Y home sale price appreciation is raw supply and demand and how much of it is emotion. That will take a while to unravel as the pandemic begins to wane. But generally the only way to decelerate the froth and pull prices back down in line in any market is to stop feeding the bull.
Don’t Panic
This is probably the most important but also the hardest not to do. Just as markets don’t plummet and stay down forever nor do they stay high. Any wealth advisor will tell you that time and patience always have been volatility’s counterbalance in both directions.
For prospective homebuyers and sellers right now, the same advice generally applies. Homeowners considering putting their houses on the market to cash in on their newfound equity shouldn’t be in a rush to do so. The housing market is unlikely to plummet to where it was pre-pandemic so the gains will still be there six months from now and likely far longer.
For homebuyers, don’t panic buy unless you have to. Houses aren’t going away or extinct. Eventually supply will catch back up with demand through increased homebuilding, development, and more innovative and alternative co-living concepts. These in themselves will directly soften prices in the upcoming year and into 2022.
Yes, mortgage rates will rise. But it will take years for rates to approach the 9% range at which I bought my first house before the 2008 crash. So the cheap money likely will be around for a while as well.
Ultimately, homes aren’t GameStop shorts or Zoom stock or even a car. They’re the most important thing in life that we invest in. And they’re even more important for more people now than ever after the COVID-19 pandemic. For that reason alone, no one should be in a rush to set themselves up for buyer’s remorse.
Sometimes the best decisions we make in life are the ones to do nothing.
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