We have seen meaningful price appreciation in most housing markets over the past 24 months. With double digit annual gains and bidding wars for homes being reported in some markets, it is tempting to think we are at the beginning of another bull market in housing. But the big questions that remain are how strong is the current recovery and how sustainable is it?
While there are certainly signs for optimism, there are also strong indicators for caution as well. As Rick Newman points out in his article in US News and World Report, there are 5 Reasons the Housing Recovery Remains Wobbly. They are:
1. Lack of good land for development;
2. Record low interest rates are due to rise;
3. Recovery is dependent on government aid;
4. Foreign buyers are driving up prices; and
5. The recovery is focused on certain markets (see 4 above).
While Mr. Newman focuses on 5 signs that homes may be overpriced, the key take away is that a homebuyer’s biggest risk is primarily in the next few years. If you are buying a home today as a short-term investment, you may want to think twice. However, if you are buying a home as a long-term residence, now is probably as good a time as ever. With 30-year mortgages at the artificially low rate of 3.5% you can lock in your housing costs for the next 30 years and enjoy the savings when interest rates return to their historic norms.
Unfortunately, even if your plan is to live in your new home for 10 years or more, life has a funny way of interrupting those plans. That is why it is always prudent to have some downside protection in case your circumstances unexpectedly change.
In US News & World Report, Robert Dietz, an economist with the National Association of Homebuilders, asks the question, “What Happens to the Housing Market When the Investors Leave?” Mr. Dietz points to the fact that the Great Recession forced many younger individuals to delay the formation of new households by moving back in with their parents and/or delaying marriage. Implicit in his opinion piece is the assumption that there is pent-up demand for new housing once these individuals return to forming new households.
This is not an unreasonable assumption. However, it may be based more on wishful thinking than actual data. Recent college grads should hold the best prospects for forming new households and re-entering the housing market. Unfortunately, Mr. Dietz does not take into account that the tepid pace at which jobs are being created has left a significant portion of this demographic either unemployed or underemployed. Combine that with the fact that this same group has over $1 trillion in outstanding college debt to be repaid, more of which is going into default every day, and it begs the question, even if they want to form new households or buy a new home, do they have the means to do so?
If economic and job growth does not materially improve, it is hard to see where the resources will come from for them to do so.