Why Homeownership is Still a Smart Financial Move

We’re convinced buying a home is still a smart financial move, and despite the chatter in some quarters, now can be a great time to enter the marketplace and begin your homebuying journey. 

Home value remains high 

As even casual observers may acknowledge, the real estate market tends to move in cycles: periods of weakness (stagnant or even declining home prices) followed by periods of growth where home prices demonstrably increase. Throw in seasonal fluctuations, homebuyer confidence and always-tempestuous interest rates and you begin to see the broad outlines of the marketplace. There are many contributing factors to the ups and downs of home prices.  

The housing sector, of course, is just one of several important sectors within the U.S. economy, and as such, its performance has reverberations within the larger economy. Additionally, housing can be a leading indicator of economic activity — specifically “housing starts” or new residential construction — meaning that its relative strength or weakness can indicate important trends in the national economy several months out.  

For our purposes, we’re mostly interested in home sale prices — what it says about buyers, sellers and housing value, today and in the months and years to come.  

The undeniable influence of mortgage rates 

The role of mortgage rates in this whole saga cannot be overstated. Low mortgage rates are the gasoline that fuel the homebuying fire — that was true 30 years ago, it was true 10 years ago and it remains true today.  

When rates dip, the homebuying public takes notice. A modest reduction elicits serious interest from homebuyers; an outright plunge ignites the kind of frenzy we’ve witnessed over the last few years (especially once the country emerged from lockdowns).  

The effect of inventory 

After interest rates (which fuel consumer demand), the biggest factor driving an increase in home sale prices is the lack of inventory. This is not a new problem. However, in a hot housing market inventory shortages invariably drive up home prices, resulting in a situation where supply in no way meets demand. The advantage here, however, is that owning a home gives you a commodity that's in demand. Real estate is one of the few assets that historically appreciates, or grows in value, over time. This may not help when buying a home, but it will certainly be a factor when you go to sell it. This can be a critical factor when relocating.  

Exuberance yes, speculation no 

As we’ve described above, the current housing market has experienced a dramatic rise in sales prices over the past few years, though that is slowing, and in some cases reversing, in some markets. Still, home values remain much, much higher than pre-pandemic levels.  

Exuberance 

First of all, there’s good exuberance and bad exuberance. The financial dot-com bubble of the 1990s was famously defined by Fed chairman Alan Greenspan as suffering from “irrational exuberance,” implying there was a psychological basis for a speculative bubble divorced from fundamentals in contrast to real value of an investment. This term was later applied to the financial crisis of 2008 as well. 

Good exuberance, on the other hand, can be seen as simple positivity within the marketplace. Taking advantage of opportunistic conditions and purchasing homes because value, need and desire merge in a satisfying way. The past few years have certainly seen an emergence of unique conditions that have unleashed incredible homebuying demand. Buyers are well financed and are hungry to own. They aren’t here to flip or turn a quick profit; rather, they’re excited to invest both in value and in a way of life. They’re looking for an improved living space — a hybrid space where they can both work and live — and in many markets they are willing to pay for it. Who wouldn’t be exuberant? 

Speculation 

Speculative sentiment — a market expectation that ascribes exaggerated value to assets (homes) not supported by fundamentals — was one of the main culprits of the 2008 housing bubble and resultant financial fiasco.  

That doesn’t seem to be the case in this market. People are buying because they see it as a great investment over the long haul. This isn’t about underfinanced individuals recklessly purchasing homes they can barely afford through dangerously structured subprime adjustable rate mortgages (ARMs). Or overconfident homeowners tapping into home value through a home equity line of credit  (HELOC) or home equity loans to buy expensive nonessential items with the hope of recouping this loss of equity through ever-ascending home prices. No, this time it’s different. 

Property owners actually possess record levels of equity in today's housing market (levels that jumped by $1 trillion between 2019 and 2020). In addition, many lessons were learned from The Great Recession. Most notably, due to the reforms spelled out in the 2010 Dodd-Frank Act, lenders have introduced tighter standards for home purchases in terms of debt-to-income ratio (DTI), employment and credit scores. In short, borrowers are better vetted than they were, which puts homeownership on better footing overall.  

It just makes sense 

A range of populations within the U.S. remain excited about the prospects of homeownership—and not just somewhere vaguely down the road, but right now. These prospective homeowners are engrossed in the current market: browsing for listings online, contacting mortgage providers and trying to find the best rate available. Clearly, demand is as steady as it’s ever been. All of this is because, despite a number of different factors, homeownership remains a solid financial move. If you have questions about relocations or other mortgage-related questions, reach out to today! We're here to help!