Is Now the Right Time to Invest in a Home? Expert Insights

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One of the best things to come out of hosting a daily LIVE Q&A for all of you on Instagram is the insights I get into your most pressing questions. And right now, lots of you want to know is this a good time to buy a house? Many of your concerns are colored by the last recession when housing prices fell substantially. So, let’s take a look at some key housing market metrics to see how today may differ from 2008… and provide some insights for what may happen to housing prices over the next few months and years. Prefer to listen? Catch a deep dive on the housing market and why prices are rising on this week’s podcast episode of Finance Explained.

This post was originally pubished in May 2020. Data has recently been updated as of April 2021.

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What Drives the Housing Market?

When all of you keep asking ‘Is this a good time to buy a house?’, what you are really asking is ‘Are housing prices going to fall again as they did in 2008?’ The housing market, like many other markets, has numerous factors that impact both housing demand and housing supply.

And if you can remember way back to high school economics, the market price is set by the intersection of those two curves.

Back at the start of the pandemic, a rather extreme market shock hampered the normal function of the housing market, limiting transactions while pushing up prices. But that trend has persisted, with listings (housing supply) continuing to drop precipitously. To understand the bigger picture beyond just the last 12 months, let’s dig in to the longer-term trends underlying the housing market, and where they are headed in the coming months and years.

Housing Demand

Since the price of houses in the housing market is determined by the intersection of overall housing supply and housing demand, let’s take a look at some of the factors driving each side of the market.

Housing demand is driven in the long-run by household growth. But in the shorter-term, demand can be highly impacted by the mortgage market.

Household Growth

The biggest long-term driver of demand in the housing market is household growth. The more households we have, the more houses we need. And household growth is driven by two key factors: population growth and demographics.

Over the last 60 years, the US population has grown steadily, though the growth rate has slowed from 1.40% to less than half that, at now 0.65% annually.

However, it is still growing, and in particular there are 3 critical demographic factors that add to general population growth to make households grow even faster.

Homeownership

Last but not least, more people own homes today. While we are far from the inflated ownership peak of the 2000s housing bubble, an increase in homeownership also drives increased demand for homes. We often see a downturn in this rate during and after recessions driven by a financial crisis (like the Great Recession in 2008). I don’t expect this to be a persistent trend coming out of the current recession, but only time will tell.

And more importantly, as you look back at all these factors – there is no huge deviation from the long-term trend, like the bubble in homeownership we saw in the 2000s. The population is growing. Household size is steadily decreasing. And there is a population bubble in prime household formation age – all of which supports increasing demand for housing.

Mortgage Market

Interest rates also play a role in the demand for housing. When rates fall, it makes mortgages less expensive and homes more affordable. It may even make people willing to buy more expensive homes because, with lower interest rates, they can afford a bigger purchase price for the same monthly payment than they could have afforded at higher interest rates.

Mortgage rates are highly correlated with 30 year US Treasuries, and as treasury rates have dropped during the recession, mortgage rates have followed. Mortgage rates hit all-time historic lows last year, but since the start of 2021, as market interest rates have increased, mortgage rates have too. However, they still remain near historic lows, and demand for mortgages – both to buy homes and refinance – is high.

Demand for mortgages was extremely high through most of 2020. However, this high demand is tempered by lenders tightening their standards for mortgage loans. Last Spring, 100s of my followers shared their mortgage and refinancing experiences. Many reported longer processing times than normal, stricter appraisals, lower loan-to-value requirements for refinancings, and multiple employment verifications both during the process and even following the closing.

Lenders were super nervous about borrowers losing their jobs at the height of the pandemic, and some borrowers were even asked to sign waivers that they won’t use forbearance on new mortgages. Lending standards are especially tightening for loans that do not qualify for government protections.

Note that these track the opinion of Loan Officers on tightening of lending standards. As long as it remains above 0, standards are still tighter – it’s only if they drop below, that loan officers are loosening standards. It appears in the latest survey for Q1 2021, standards have stabilized, but that means they are still tighter – meaning banks are requiring things like higher credit scores, stricter appraisal values, more proof of employment – than they were pre-pandemic.

Historically, defaults spike during recessions due to unemployment, and at historically low mortgage rates, lenders cannot afford to lend without being cautious. These tighter lending requirements are the one area tempering demand for houses in the current market. We have seen defaults tick up slightly already – but the widespread availability of forbearance, as well as the generally higher credit quality associated with most mortgages today – is likely to keep defaults at a minimum… for now.

So overall, long-term trends support strong demand for housing. And if we return to our supply and demand curves, increased overall demand for housing, results in more homes sold at higher market prices.

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Housing Supply

Now, let’s talk about the supply side of the housing market. Housing supply basically boils down to two components: new housing completions added to the housing stock and existing home inventory.

New Housing Completions

Historically, we have seen housing completions exceed household growth by about 30% annually. This is necessary to replace deteriorating housing stock. However, following the Great Recession, we saw a dramatic fall off in new construction, and since that downturn, housing completions have been below what is needed to meet household growth demands.

This has created a housing supply shortage, especially at the middle and lower ends of the housing market, as that is where demand is greatest and not enough new construction is being done. According to Freddie Mac, the leading government-backed mortgage lender, the housing shortage increased to 3.8 million units by the end of 2020 vs. long-term demand. The main driver of the housing shortfall? The long-term decline in the construction of single-family homes.

Existing Home Inventory

Active listings have been trending down for the last several years, even as demand for housing increases. This trend accelerated dramatically during the pandemic, creating a bit of a vicious cycle.

The pandemic brought even steeper declines to active listings, as sellers were staying home during quarantine, and less likely to want to open their homes for showings and to buyer traffic. As one local realtor pointed out, even sellers who would like to move or upgrade to a bigger home, they can’t find anything on the market, so they aren’t listing their existing home with nowhere to go.

This short supply paired with high demand is pushing prices up, mostly organically, as multiple offers above listing prices are coming in for homes given limited options for buyers. Homes are selling faster (with median days on market down double-digits, and fewer and fewer homes see any type of price reduction vs. listing price, with most realtors anecdotally reporting far more sales over listing price.

And as I shared with you at the outset of this post, deals are getting done at higher prices, given short supply.

Vacancy Rates

To further demonstrate housing is in short-supply, we can also look at homeowner vacancy rates. This is housing for sale that lies vacant. At the start of 2020, we saw homeowner vacancy rates that we hadn’t seen since the 1970s. So far, vacancy rates have remained at these historically low levels.

So, overall, we see a reduction in new housing stock, and fewer active listings, leading to a reduction in supply. This shifts the supply curve to the left, resulting in fewer homes sold at higher prices.

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So, is this a good time to buy a house?

So what does this all boil down to in terms of buying a house right now? What does it mean for housing prices and whether or not this is a good time to buy a house?

Current Market Dynamics Support Prices

Increasing demand for housing, driven by household growth and low interest rates, combined with a supply shortage from fewer housing completions, causes rising housing prices.

These supply/demand dynamics are especially true in the lower and middle price portions of the market, where most first-time homebuyers are looking to buy. This is why we see prices at this end of the market rising, as well as little to no inventory.

But Housing Affordability Is Concerning

One metric to keep an eye on is housing affordability. Median home sale prices, pushed up by the supply and demand forces outlined above, continue to grow faster than median family household incomes.

Housing affordability compares median home sale prices to income, and that ratio is back at pre-Great Recession levels. While the current record-low mortgage rate environment helps make this attainable, if incomes fall during a period of long, drawn-out unemployment, or if interest rates substantially increase, this will become unsustainable.

Already, in many metropolitan markets, housing affordability exceeds even these high national ratios, placing home ownership out of reach for many families and keeping rents inflated as well.

Markets are Local & Decisions Long-Term

Two last key points I want to remind you all of:

1. Real estate is local.
2. Buying a house, like any major investment, should be a decision you make for the long-term.

Realtor.com provides many of the metrics I shared here on a national level for major metropolitan areas, by county and even by zip code. If you are in the market for a home, I would highly encourage you to check out the real estate data for your area of search to know just how competitive the market is in your area.

Everything I’ve talked about above is what is happening at the national level. And many of these trends exist in markets across the country. But it is important to understand exactly how these supply and demand forces are playing out in your local area. Check out this replay on IGTV of local realtors from around the country talking about the dynamics they are seeing in their markets right now.

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Those in densely populated urban areas, like New York City, may be experiencing a decline in population right now, while more suburban neighboring areas reap the benefits. Regionally speaking, the South continues to grow faster than the Northeast and Midwest. So be sure to look at these metrics on a more regional and local basis as well.

And as our local realtors shared, the market can change, and they, as well as many potential sellers, are waiting for supply to increase as we head further into the Spring and Summer selling season, so be sure to ask a realtor in your area what they are seeing when you are looking. The questions I asked each of the realtors in the LIVE Q&A above are a great list to use to gain insights into your market.

Finally, remember that you are buying a house to make a home. Most of us aren’t doing it to flip it and make a huge profit in the near-term. We are looking to live and raise our families there for a while. Be sure to frame your purchase decision through that lens, and think about where the market will be over the long-term, not just in the next 12-24 months. However, if you don’t plan to be somewhere for a while, it may not be the right time to buy for you.

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What else would you like to know about the housing market? Feel free to leave them in the comments below, or join me for LIVE Q&A on Instagram Wednesdays and Fridays at 9:30AM ET. I’ll also be covering a deep dive of the Housing Market and the factors that drive it on this week’s Finance Explained podcast.

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Thank you for sharing!