Yes it is. Watch "The Big Short" if you think the housing market might be less crazy. So take my advice with the appropriate skepticism:
With the lock downs and rise in remote work there has been upward pressure on rural and low density housing prices, same as toilet paper and weightlifting equipment. That makes it a seller's market. I have rural neighbors moving forward their plans to sell for that reason. As a buyer I might be inclined to wait for the pandemic to pass and for prices to revert somewhat to the mean.
This advice is brought to you by someone who managed to buy at the very top of the real estate market. I think the crash happened when I signed my purchase agreement.
The opposite force (motivating you to buy now) is that interest rates are very low, and that will probably change in the future.
It's low for you, but also low for everyone else. Low interest rates push purchase prices higher because people care about monthly payments, not the final price. Overall it's a wash and you don't gain/lose for buying in a low/high interest rate environment.
Low interest rates means house prices are high now, and they will fall when interest rates climb, giving you capital losses. Much better to buy when interest rates are high, as rates will fall in the future and house prices will increase, giving you capital gains.
In both cases, you will pay the same amount for the same house in terms of monthly payments, as households are payment constrained, and they don't particularly care what percentage of their monthly payment goes to pay for principle and what percentage pays for interest. They max out what they can afford in terms of the total monthly payment, and thus houses prices go up and down in the opposite direction of interest rates.
But be careful, even though it is much better to buy when rates are high, that doesn't mean that waiting for rates to go up is a good strategy, as rates may not go up for twenty years, or even a hundred years - you don't know. But certainly a low interest rate environment is a terrible time to buy a house, even if you have to suck it up and buy anyway.
Bottom line, rates will change when there is a financial regime change due to the current system no longer working. I think it's obvious that what we are doing now is unsustainable: running massive deficits, enormous capital account inflows, and dollar appreciation. In terms of what would be the breaking point, one can only speculate as to whether it is too much inflation, or too many defaults, etc. At some point, the snowballing side effects of our current policies will just stop working, at which point a new regime will be needed. I don't know when.
For a big picture view, I recommend Sydney Homer's A History of Interest Rates. It's a great read and discusses long term interest rate regimes as well as various triggers that changed them.
In terms of trying to time these regime changes, I wouldn't bother. What you can do is hedge a bit so that you are not financially ruined in case there is a regime change. I would not use the low IR regime we have now to massively go into long term variable rate debt, for example, or massively go into long term fixed rate debt if you can't handle a rate increase. So just be aware that rates will go up at some point, and make sure you can handle that before taking on a lot of leverage.
You can't paint with such a broad stroke without crunching numbers - I think the better, but less satisfying answer is "it depends". It depends on the specific market and pricing dynamics (past and future), as well as on the length of the mortgage term and how high interest will go in the future - which is hard to know beforehand. Further complicating this are objective factors such as flexibility (of renting), and how much you're willing to pay for it. Buying a house is huge time-sink: expect to screen hundreds of houses and actually viewing dozens of them. Then you have to put together an offer quickly. If you're unlucky, your offer may be tied to some other buyer and the seller may ask you to write a motivating essay on why they should sell you their house - which I find insulting and time-wasting.
To GP: you need to write down actual figures and work it all out for best & worst cases - estimates are fine. When you are done, pick a path you are comfortable with.
https://www.appraisalinstitute.org/Nearly50PercentofHomeSale...
Edit: Also worth noting that real estate markets are more local, so there exists the chance that you might still be able to find some affordable houses but depends on the area.
This is true, but assumes that prices drop significantly rather than merely stop rising like crazy and also doesn't include that if you're renting, you never get that rent back from the period of time you were waiting.
Yes, pretty much. We are definitely in an asset price bubble but "the [housing] market can remain irrational longer than you can remain solvent" (with apologies to Keynes).
The strategy I have successfully pursued in two cross-USA moves: find a not-too-expensive house in a neighborhood that has some kind of long term value, whatever that means (good schools? close to nature? cultural opportunities?). Remote work is great, but try to be within commutable distance of non remote opportunities in your field as a hedge against future change.
That way, even if the market plunges in absolute terms by the time you need to move again, relative value should hold up? Hopefully?
Unlike my experience buying in France, the US does not do bridge loans. You are a) lucky and close as a seller and buyer, b) take on 2 mortgages hoping the old house sells, c) are temporarily homeless, d) or temporarily renting.
Housing is super emotional and I hate having to make emotional decisions. You have to make a lifelong decision based on a 30 minute tour. And buying in a hot market just makes everything more stressful. I'm not surprised people are making lightning quick decisions because hesitating is not an option.
- Do you have confidence that you'll be able to continue working from wherever you move to?
- Are you looking at a house or a condo? (It's generally easier to rent an apartment than a house.)
- What are your motivations to buy? There's plenty out there on the financial side. Some of it is even reasonably accurate. However, IMO you should probably be thinking more about whether you want stability and the ability to customize a home or are you wanting to maintain a degree of flexibility if you decide to move somewhere else in a few years?
- Do you know the area(s) you're thinking of moving to? If not, it may make sense to rent for a while while you decide if that's where you really want to be.
> The usual rule of thumb is that you can afford a mortgage two to 2.5 times your annual income.
So for the median family, $140K-$170K.
I'm not sure where the median family lives that they're buying $170K homes that they were previously renting for $2K/month, but it sure ain't anywhere near here.
Not to mention appraisal discrepancies, which require you to have the funds for the downpayment, for the closing, and to cover the appraisal discrepancy dollar for dollar.
But generally, I'm just trying to figure out how we come to the conclusion that the average family is putting anything close to a fraction of $200K to a downpayment.
House prices are ballooning for two reasons right now- COVID and interest rates. COVID means you are going to pay premium regardless rightn now, interest rates are more interesting. Interest rates are up a bit from their bottom at the beginning of 2021, but are still historically low. Because so much of a house price is financed, if your time frame is long enough paying a premium on a house right now might be worth it now if you expect interest rates to rise. Using some VERY bad financial math, a $500,000 house financed at 3% for 30 years is "cheaper" than a $400,000 house financed at 5% on a cash flow basis.
Transaction costs for houses are high- expect to pay 8-10% of the price of the house to get is sold (this goes to real estate agents fees, taxes, prep work, etc.) If you aren't sure you are going to stay in the area for a long time than definitely don't buy- think of it as your house immediately depreciating by 10% when you buy it.
Traditionally, housing prices has also been considered a good inflation hedge, if you want to factor that into your calculations. However, that has been way less true post 2000 (where there hasn't been much inflation and housing prices have been way over the map.)
Finally though, housing isn't just a investment, it is also a consumption good. In my case that was probably the deciding factor for us- we choose to increase the amount of money we are spending on housing because that is what we wanted to buy.
Some more insight into our thought process: 1) We knew we wanted to buy a house in one of three neighborhoods and had always planned to move within within the 2022-2024 timeframe. We moved up our time frame by the year, but this was always happening for us. 3) We are already bought into the area, so we had already benefited from the overheated market. 4) We timed our interest rate lock just about perfectly- interest rates are now 0.5% higher. 5) The house that came on the market is across the street from friends of ours, we were willing to pay a premium to be near our social circle.
In the end, we bought a house I fully believe will be worth less next year than today, but will be OK (althought not great) as an investment in 20 years (which is our time horizon.) In your case, if you aren't super familiar with the area or aren't sure you have a 10+ year time horizon you might want to rent just to give you time to understand the new city your are moving to- the type of mistakes you can make in buying a primary residence aren't just that you lose money on the asset, but that you don't like where you live for years.
To the degree it's actions that would have happened anyway, it probably implies there will be something of a dip after the current spike.
As long as you don't put more than ~30% of your money into a single asset (e.g. a house), then you're pretty certain to always make money in the long-term.
Everyone I know who "owns" a home first had to save up for a 3-20% down payment, which translates to having 500-3,300% of their money in the asset.
Biggest outlier I know personally put 50% down, so 200%.
Obviously I know that cash buyers exist too but that's not most people, unless I'm woefully wrong.
That wasn't what I was referring to. Net worth is (assets - debts), so the money for a down payment is largely the only part of a house that contributes to net worth at purchase time.
In other words, your down payment should be less than 30% of your net worth. Still hard to do in many places.
This is probably one of the few times when building new is cheaper than buying old. New builds with modern finishes are more likely to hold value if/when there’s a downturn.
If you're small fry, you're not going to be able to secure the best workers, and you can easily get taken advantage of because you have no idea what shortcuts people are taking if you're not checking up on things.
Also, materials costs are insane right now, if you can even get them in a timely fashion. I know someone who took out a construction loan early 2020 based on estimates pre pandemic. They started building recently, and blew threw their budget on lumber alone and had to draw from retirement accounts to keep going.
It is a great learning exercise, but not one many can afford on their primary residence.
This. Not just materials but parts because of supply chain backups. Oh, and general worker rates. I just had to replace a hot water heater. Big box stores had prices listed (~$1300 but no stock). Plumber wanted to charge $4k for the equipment and installation. Luckily I knew someone who had wholesale accounts, called all over the state, and found one. Then I did the install in ~2 hours. Dealing with that for an entire house, sounds like a terrible experience.