Buying a home can’t get any worse, right? It can — and probably will.
Buying a home can’t get any worse, right? It can — and probably will.
Prospective homebuyers are understandably feeling the pressure of high interest rates and historically high prices. According to Fannie Mae, four in five Americans think it’s a bad time to buy. Yet this may be a better time to buy than any other point in the near- or medium-term future.
That advice may seem at odds with the headlines: U.S. mortgage rates are around 7% and home prices continue to rise (the FHFA just reported a rise of almost 7% in the first quarter of 2024 compared to the same quarter of 2023). Add in flagging consumer sentiment due to persistently high inflation and concerns about unemployment, and the housing picture appears grim.
What’s missing from this equation are the two most important factors for predicting future economic conditions: supply and demand. The truth about housing in the U.S. is that supply remains painfully low while demand is structurally positioned to continue growing.
When the U.S. was churning out close to 2 million new homes a year back in 2005, the nation’s population was 296 million. But there are 30 million more people in the U.S. now, while 1 million fewer homes a year are being built. In the decade that followed the 2008 Great Recession, the U.S. built just 500,000 new homes a year.
Construction is lagging for many reasons— from government red tape to building costs to NIMBYism. None of these factors will be fixed anytime soon. Plus, more than a decade of underbuilding has a compounding effect; pent-up demand will take years to clear, at even the most opportunistic estimates for future construction.
At the same time, new demand for homeownership is ramping up: There are 71 million millennials, the largest U.S. adult demographic population, reaching the stages of life that typically drive homeownership decisions.
Consequently, inventory and sales of existing homes have plunged to their lowest level since 1995. The demand is there, but the pipeline is clogged.
There’s little the U.S. Federal Reserve can do to make home buying more affordable. High interest rates clog the pipeline of existing home sales and prices have no impetus to go lower. When the Fed ultimately does cut interest rates, increased real-estate demand should return, but the lack of supply will remain.
In other words, high home prices today could soar when the Fed lowers rates. Given that prospect, buying a home now could be less costly than waiting and hoping for a big drop in real-estate prices.
While today’s high rates on mortgages are scaring off some buyers, the chance to purchase now before demand explodes — and refinance the mortgage later — can be a strong opportunity for those who can afford a few years of more expensive payments. Once the Fed eases its policy, refinancing could mean lower payments on a home that has appreciated in value.
Trying to time the housing market is no easier than trying to time the stock market. Housing is almost always expensive and difficult to access — and every generation thinks home prices have gotten out of hand. Yet, over time, prices have consistently continued to rise.
What to look for in buying a home
Home-buying right now isn’t easy. But there are a few key pieces of advice that I like to share with anyone buying into the real-estate market.
First, homebuyers should start with the attitude that they are not necessarily looking for a forever dream home, but the best home for right now. Buying is not a decision that will define the rest of a life, and keeping that in mind ensures that there’s less surprise or disappointment.
Next, rather than searching for new construction, which is usually priced at the top of the market for that housing type and location, buyers should consider searching for homes that could use a little bit of value added to them.
As long as homebuyers are clear-eyed about what they want and pursue that goal with patience and dedication, real estate is a solid bet. In fact, they should be excited to start the journey of buying a new home.
Joshua Ernst is the founder and CEO of Backflip.