The Dream Of Homeownership Is Still Alive: What To Keep In Mind Before Pulling The Trigger
Homeownership lays the cornerstone to prosperity for most American families. The home becomes not only the locus of family life and pride, but also a source of funds in difficult times and a substantial inheritance for family members at the end of the homeowner’s life. Our financial system has been constructed around the social and economic benefits of homeownership not only to the individual but also to the community and to the nation. In almost no other country is home mortgage interest tax-deductible, or borrowing terms designed to be as friendly to aspiring prospective purchasers.
The year after the pandemic began, shrinking inventory put enormous pressure on homebuyers in non-urban locations. As virus cases boomed in cities across the country, suburban and exurban neighborhoods from Massachusetts to Montana experienced a surge of buyer demand which led to multiple offers on almost every properly priced property. Combined as it was with historically low mortgage rates, this situation pushed local buyers to the edge of their financial comfort zones in order to compete against wealthier purchasers fleeing the cities. Prices rose. Competition became even fiercer as more inventory was absorbed and fewer homes came onto the market to replace those which had been snapped up. The entirety of 2021 followed this pattern across most price ranges and parts of the country: anxious buyers competing for fewer and fewer homes. In New York City, where so many fled in the first months of the pandemic that many pundits predicted that the city would “never be the same,” it has come back stronger than ever. The story of 2021 has been a story of insatiable demand only partially satisfied by a shrinking inventory of available listings.
So what is an aspiring homebuyer to do? At a time when lack of available property has put substantial upward price pressure on the housing market, should today’s hopeful homeowner wait? Should they stretch? What makes the most sense in the current environment?
Of course, one size never fits all. Buyer circumstances determine the most prudent course of action. But here are a few guidelines:
- Timeline matters. While housing has been a great investment overall since the middle of the 20th century, the last decade has been less reliable. Many buyers who bought 5 or 6 years ago have had to accept losses if they needed to sell during the past 18 months. So a longer timeline makes sense today. Those contemplating a purchase for fewer than four or five years should rent instead; there is no certainty of a decent return on a three-year turnaround time.
- Down payment matters. A buyer who lacks sufficient funds to make a down payment on a home which will accommodate him for at least five years would be wise to continue renting. Another year or two may help them assemble funds to make a down payment on a more suitable home. Of course, in today’s environment, this calculation must be weighed against the certainty of higher mortgage interest rates a year from now. Every situation is different. For some buyers who lack savings but have strong income, postponement may be the right solution. For those in the opposite position, using that down payment money today while securing a cheaper loan may be the better choice.
- Priorities matter. Millennials and Gen Z buyers prioritize differently from their elders. Their aspirations tend to the experiential: many would prefer a fabulous trip to a fabulous home. In addition, their experience of the housing market during their adult years has been very different from that of previous generations. They have come of age during the recession and its aftermath, a period of instability in housing values nationwide. And while this generation is now marrying and settling down with children, they remain less materially focused than their parents. When they buy, they tend to seek out more unusual homes in hipper neighborhoods, many of which were unsafe or unsavory not so many years before. And many still prefer to rent, to avoid being too tied down. This is a group that likes flexibility.
For buyers who are drawn to stability or hope to raise a family, rooting in one place can make a lot of sense. For these consumers, the time to make a purchase is now. Both prices and interest rates are likely to rise during 2022 as inventory remains low and the Fed attempts to tame runaway inflation. Rents, which also rose in many parts of the country during 2021, seem to be coming back into line with their typical annual cycles: slower in the winter, accelerating during the spring and summer, decelerating during the fall. That said, here, too, supply remains extremely constrained.