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Is It A Bad Time To ...

Is It A Bad Time To Buy A Home?

By Oren Jacobson 3 min read

 

According to a recently released report, just 21% of Americans think that now is a good time to buy a home. A sharp drop from the 28% reported in September, which prompted CNBC headline writers to exclaim, “More Americans Say Now Is A Bad Time To Buy A Home.”

Don’t be mad at the headline writers; their job is to get you to read articles, especially because I’m using the same tactic to get you here in the first place. That being said, this headline is misleading. If you dig into the Fannie Mae survey specifically referenced in this article, you will find that “consumer home purchase sentiment remains robust,” according to Doug Duncan, Senior Vice President and Chief Economist at Fannie Mae. Low interest rates and a strong labor market still provide plenty of strength for the housing market.

That being said, this headline— and the raw data which shows both a decline in those who think this is a good time to buy a home and that the previous level was below 30%, to begin with— reflects an accurate reality that we’ve been warning about for most of the last two years. Specifically, housing affordability is a real issue.

Despite an incredibly low unemployment rate, long-running economic expansion, and historically low rates, overall housing demand isn’t nearly as robust as one would expect given those generic macro-economic trends. Why? Housing prices are just too expensive.

We’ve explained the supply side challenges before at length, so I’ll spare that conversation for now and point to a demand-side problem you probably don’t think of as being associated with housing: real wage stagnation. For all but the top 10%, real wages have been essentially flat for 40 years. Remember that real wages factor in your buying power. So if a $60,000 income today can buy the same amount of goods as a $30,000 income could in 1980, then your $30,000 raise over 40 years is worth exactly zero dollars in terms of real wage growth.

Combine rising housing prices with stagnant real wages, and what do you get? A large share of America is unable to afford a new home today. While just north of 60% of Americans own a home, there is a sizeable population that would like to own but cannot afford to. More simply put, we simply do not have enough affordable housing in America.

This is especially problematic in new construction as the supply-side costs make building affordable new construction difficult, and there is still a big enough buyer pool among the top 10% of earners to keep most builders locked in the pursuit of those individuals. Or the supply-side costs themselves often force builders to chase a price point that a sizable portion of the population cannot access. The combination of a lack of affordable housing and prices increasing due to supply-side constraints leaves many people thinking this is a bad time to buy a home.

Which brings us back to the headline of this article: Is it a bad time to buy a home? Absolutely not for those who intend to live in their home long term. The cost of an extra point of interest on your loan is far more expensive over the next thirty years than the likely price decrease that would happen if the market turned down.

So if you’re buying a home to live in for more than the next handful of years, this remains a great time to buy. Locking in historically low rates is always smart. And if the market falls, it will come back again. It always does. So you can ride out any short-term valuation dip (which is only on paper) and take advantage of the opportunity to borrow at a rate that your parents would be insanely jealous of for the long run.

Originally published Dec 3, 2019 under Explore the latest topics, updated February 1, 2024

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