How strong is the housing recovery?

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.