Homebuying in 2024:
Rates suck. Prices suck. Competition can be high.
But it still may be the best time to buy a home from this point forward. When I say 'best', I am not saying its a 'great' time to buy a house, it definitely is not. What I'm saying is that the history of housing prices over the past 50 years suggests it will cost even more by waiting.
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Unless your next move is to downsize, even with a tough market and higher rates, it will be cheaper and easier on your monthly budget to buy the home you want now and just keep it for the next 10, 20 or 30 years than it will be in the future.
There seems to be a lot of potential homebuyers waiting on, and counting on, the inevitable slashing of home prices because we've been told, 'Everything that goes up must come down'. I think this is a mistake. While there may be a small dip in prices over the next 12-24 months, a crash creating a significantly better buying opportunity is highly unlikely. Depending on your time frame, normal appreciation will push up the cost substantially. Use the calculator link below to estimate the potential future cost of homes in the price range you might consider.
What will it cost to wait?
No Meltdown / No Housing Bubble
We are not in a housing bubble. Not all periods of rapid price increases are the same. Many people naturally think to compare the recent run-up of prices to the period before the 2007-2009 housing crash, but there are many differences. To say lending standards were a little loose prior to 2007 is an understatement. Here are some of the highlights:
- No Down Payment
- Low or no credit Score
- No Employment verification
- No Income verification
- No asset verification
- High debt loads
- High percentage of ARM loans vs fixed
- ARM loans that changed interested rates MONTHLY
- Anyone could buy multiple investment properties - no experience and no money down
The demand for homes during that period was fueled by allowing almost anyone to buy a home regardless of their qualifications. Once that fuel was turned off, there was nothing to prop the market up.
Why this time is different
By contrast, the current market is built on fully verified, well qualified buyers with good credit, stable incomes, less debt and large down payments. In many cases, even when the appraised value came in lower than the sales price, the buyers paid the difference in cash. Per NAR (National Association of Realtors), 22% of the buyers paid all cash for their homes. Almost all financing was with fixed rate mortgages below 4% (many below 3%).
Even the investors are different this time. They are not just anyone who saw a few episodes of ' Flip it' shows on HGTV. They are more professional. They must meet higher standards, put more money down and have assets in reserve to be approved for a mortgage today. Many of these are hedgefunds or large companies paying all cash. Even individual investors paid cash or put at least 15% down in order to get financing.
Their motivation is different as well. Unlike before, most investors today are buying to hold properties for renting out and not just a quick flip for cash. If you are buying to flip, every month that goes by costs money and investors are usually quick to lower the price. With rental income offsetting the expenses, investors can just sit back and wait for the price they want. Many investors have no plans to sell for decades.
This market is different. These homeowners are not walking away from their homes so there will be no record breaking number of foreclosures like we saw previously. The stricter mortgage guidelines, the larger down payments and the financial profile of the recent buyers indicate they will simply ride out any downtown in the market. They will not need to sell, but if they choose to, they have plenty of equity to work with and no need to 'short sale' or face foreclosure. They can afford to stay in their homes. Time is on their side and this will keep prices from crashing.
Housing Price History
As you can see from the above chart, the overall trend of home prices is up. Aside from the meltdown period (2007 - 2009), there are occasional minor dips followed by steady appreciation. By the 1st quarter of 2013, home prices had completely recovered from the meltdown and were on the way to setting new highs. Prices rose consistently through 2017. In the 1st quarter of 2018, there was a year-long dip until the 1st quarter of 2019 where prices started to recover. Price escalation briefly paused at the start of the pandemic but then shot up like crazy.
Based on the above chart, here are the average appreciation rates over certain time periods:
- 1980 - 1990: 6.88% per yr
- 1980 - 2023: 4.74% per yr
- 1980 - 2020: 4.19% per yr
- 1990 - 2023: 4.10% per yr
- 1990 - 2020: 3.33% per yr
- 2010 - 2015: 5.34% per yr
- 2020 - 2023: 12.44% per yr
In my opinion, the 3.33% average appreciation rate from the most recent 20yrs (1990-2020) without the crazy last 3 gives a good, conservative estimate of what to expect in normal markets going forward.
A recent Zillow survey of economists expressed similar views:
- US home prices will fall 1.6% in 2023, then rise by an average yearly rate of 3.5% through 2027
- That's the same pace that was seen in the relatively stable period from 1987 to 1999.
- Under that scenario, home prices will be up 23% in 2027 from 2021 levels, according to Zillow
It is important to distinguish between 'sales being down' and 'sales prices being down'. So while you may see lots of headlines and stories touting 'Big decline in home sales' or 'Home sales at record lows', it doens't mean the housing market is in trouble. 'Sales going down' refers to the number of transactions, not the prices of the homes. There is a supply shortage which is keeping the prices up even while the number of sales is going down. More on this in the 'Housing Supply shortage' section below.
Housing Supply shortage not ending soon
If you were wondering why it's so hard to find a house these days, just look at the graph above. We went from over 1.4 million listings in 2017 to just under 600k listings this year. The good news (We'll take any we can get) is that this is up from a low of 344k listings from Feb 2022. However, this is starting to trend downward again.
Shortage of New Homes:
According to every report I could find, we have a housing shortage and it will take 7 - 10 years before the supply/demand ratio is more in balance. The National Association of Realtors (NAR) estimates that there is a nationwide shortage of about 5.5 million homes, while Freddie Mac estimates about 3.8 million. Although the numbers may differ, everyone agrees that builders aren't building homes fast enough to keep up with the increasing population of people wanting to buy a home.
Ironically, most of the experts blame the shortage today on the 2007-2009 crash. Homebuilders overbuilt before the crash and didnt want to get caught in that scenario again, so they have been 'under-building' since then. Labor shortages, higher material costs and the supply chain issues we've had over the past 3 years made the problem worse. There has been an increase in housing permits this year, but it will still take years of increased production to significantly reduce the shortage.
Shortage of Home Listings:
Another factor working against potential homebuyers is the lack of existing homes on the market. Rising interest rates are a double-edged sword, keeping prices down but may also be keeping the number of listings down as well. Millions of homeowners either bought or refinanced their home with 30yr rates in the 3's or less while we were at historic lows. In fact, a REDFIN Report estimates 85% of all homeowners have locked in rates of 5.00% or under. With rates doubling in the past year many would-be sellers are choosing to just stay put and not give up their super low rate.
How long will they wait if rates if rates stay at this level? We don't know, we are in uncharted territory. The last time rates where this high was Novemember 2008 when rates had steadily declined from over 18%. Back then 6% rates seemed like a gift. Since December 2008 we have had rates of 5.25% or less (mostly less) so sellers weren't concerned with keeping their current rate as the new one would be the same or better.
Another reason sellers are hesitant is even if they are willing to trade their low rate for today's higher rates, they have few options for where to go themselves. The prices for potential move-up houses have also risen substantially and they suffer from the same lack of inventory.
This is a scenario we haven't faced before, so it's difficult to predict the outcome or when this housing gridlock may end.
Lock your price, Don't wait for the rate
Lock your Price
If you could buy a home at 2018 prices, would you? Better still, if you had the opportunity to buy a home today for the very top of the market price in 2007 (before the crash), would you jump at the chance? Given the huge price increases since then, you probably would. You could've overpaid for almost any property in 2007 and it would've just about doubled in price if you kept it until today. Obviously, buying at the bottom of the market in 2009 would be better, but timing any market is next to impossible. History repeatedly shows that time is your friend when you own a property and with very few exceptions, it is your enemy when waiting to buy.
I think 3018 Addison Ct, Bensalem PA is a great example of locking in your price. This is a 3br, 1.5 bath townhome with 1752 sqft of living space. This home is what most people would consider a starter home and has sold a few times in the last 20yrs.
This home was bought in 2010 for $200,000 when rates were about 4.95% for a 30yr fixed mortgage. Assuming the buyer put 10% down ($20,000) and financed $180,000, their principal & interest payments would be $961 a month.
This property was sold again in 2018 (8yrs later) for $269,000 when rates were about 4.55%. Assuming 10% down (now $26,900) and financing $242,100, this buyers principal & interest payments would be $1,238 per month.
February 17, 2023 this home was placed on the market with a price of $365,000. It went under contract within 5 days and sold over asking price, at $390,000. A 10% downpayment is now $39,000 and financing $351,000 at todays rate of 6.625% would have a principal and interest payment of $2,247 per month. Even if rates were 3.5% today, this new payment ($1,576) would be over $338 higher per month compared to the 2018 price and $615 more per month compared to the 2010 price. You cannot go back in time and change the price. With home prices continually rising, it's generally better to lock in your price as soon as you are able.
Don't wait for the Rate
In the example above, a substantial rate cut wasn't enough to offset the increased cost of the home. Rates can only do one of three things: they can stay basically the same, they can go up or they can go down. If you wait a few years and rates are the same, you are most likely paying more for a home. If rates go up, you now have the double penalty of paying a higher price and financing at a higher rate. If rates go down, you might not break even much less see any meaningful savings.
Using the property above, the rate would've had to drop almost in half (from 4.95% to 2.50% ) just to save $4 per month ($957 vs $961) if you bought at the 2018 price instead of the 2010 price.
While you can't go back and change your price, you can get a rate do-over if rates go down after buying a home. Let's pretend the rates were reversed and the 2018 buyer finances the home at the 6.625% rate and the 2023 buyer gets 4.55%. The 2018 buyer would have payments of $1,550 and the 2023 buyer payments would be $1,789 per month. Already we see the 2018 buyer still has the advantage. The 2023 buyer does not have the option of paying the 2018 price but the 2018 buyer has the option to refinance at the new lower rate, creating an even bigger advantage.
After making 8yrs of payments, the 2018 buyer has 22yrs left and a remaining balance of about $216,500. The cost of the refinance would be about $4,300. Financing $221,000 for 20yrs @ 4.55% has a payment of $1,404 per month. This is $385 cheaper per month than the 2023 buyer AND shaves 2yrs off their original 30yr loan. The 2018 buyer would save over $152,000 vs the 2023 buyer under this scenario.
The Bottom Line
If you're not currently in your 'Forever Home', take a few minutes to consider what that would look like to you, do the math, and then plan how to get there sooner rather than later. When you look back 20 years from now, you will be glad you did. Use the contact form for any questions or comments.
Disclaimer
The views stated here are my opinions based on over 30 years experience as a mortgage professional as well as buying and selling several homes in my personal life. I'd like to think they are well-reasoned, educated opinions but I might be biased :)