You have to live somewhere

A house is a place to live. It’s a place to make your own. It’s also a form of consumption more than an investment opportunity for most homeowners. A house can still pay psychic income which is probably more important when it comes to your happiness.

You have to live somewhere
Capital Thinking | You have to live somewhere

Capital Thinking  •  Issue #1099  •  View online

You have to live somewhere which means you either pay rent or make mortgage payments.

Trying to time the housing market like it’s the stock market can be a mistake because a home is the most emotional of all financial asset purchases.

No one lives in their Apple shares. No one decorates or landscapes their U.S. treasury bonds. Your school district or neighbors aren’t determined by the mutual funds in your 401(k) plan.

-Ben Carlson

The Case For Buying a House Right Now

Ben Carlson | A Wealth of Common Sense:

According to a recent Gallup poll, just 30% of Americans think now is a good time to buy a house:

Ben Carlson | A Wealth of Common Sense

It’s the first time this number has ever been below 50% going back to 1978.

Can you blame them?

National home prices were up 20.9% year-over-year through March.

Mortgage rates have gone from less than 3% at the start of the year to well over 5% now, the highest level in 13 years.

Between rising monthly payments and much higher down payments, housing affordability has become a problem in a hurry.

Bloomberg interviewed a housing expert from PIMCO recently who said it’s time to sell:

“It’s only a good investment if you buy it at the right time,” he said. “If I were to buy a house today, I would probably get max 2% return on it. And I can find other things I can make money on other than a house.”

He could be right. The returns in housing over the past 18 months or so have been breathtaking.

The New York Times calculated Americans have added $6 trillion in housing wealth over the past two years:

Ben Carlson | A Wealth of Common Sense

And that equity doesn’t include rental properties.

The case for not buying a house is about as strong as it’s ever been and I don’t blame anyone who wants to sit out the housing market right now.

But allow me to play devil’s advocate to see what the other side of the argument is here.

This would be the case for buying a house right now:

Your income should grow over time. Yes mortgage rates and prices are higher but buying a home means locking in a monthly payment. Most people see their incomes rise over time while that payment stays fixed.

It’s obviously more expensive to buy right now but a fixed payment is something you can grow into over time, assuming you have your finances under control.

You’ll probably be able to refinance your mortgage in the next recession. Is the Fed just raising rates to cut off inflation so they can lower them again if/when a recession hits? It’s possible.

And even if the Fed isn’t the culprit, whenever the next recession hits odds are mortgage rates will fall.

Take a look at mortgage rates back to the 1970s and see what happens around the recessionary periods (the gray bars):

Ben Carlson | A Wealth of Common Sense

They fall!

Here’s the data:

Ben Carlson | A Wealth of Common Sense

The average drop in rates is 3.5%. The average change from the previous level was a decline of around 35% of the total.

Now you could say a lot of this is because interest rates were falling for much of this period but it happened during the rising rate environment of the 1970s and early 1980s as well.

I don’t know when a recession is coming but when it does I would imagine mortgage rates will fall and homeowners will be able to refinance at lower rates yet again.

Rents are rising too. Housing acts as a hedge against rising rents. And rents are rising:

Ben Carlson | A Wealth of Common Sense

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The Case For Buying a House Right Now
The pros and cons of buying a house in this market.