August 25, 2022
2021 set records for home prices, and into 2022, we are still seeing a hot market. Though mortgage rates have climbed, there is still demand to buy. For the first quarter of 2022, the National Association of Realtors (NAR) found that the median single-family home price was up 15.7% over last year, and there is no indication that home price increases have slowed significantly in quarter two.
Most people will find this surprising because we hear about the rising rates nearly every day on the news and how this affects home sales. There is, however, one factor that can explain why the buyer demand has held steady in the face of rising borrowing rates, and that is Fear of Missing Out or FOMO.
FOMO and the Regret of Not Buying a Home
Currently, the number of homes available for consumers to purchase is at a historic low, making the competition hot. Home starts were slowed due to the Covid shutdowns keeping workers at home, and the supply chain issues that followed resulted in rising prices for home building raw materials. The result has been bidding wars as the norm, and the NAR also found that homes are on the market for only eighteen days.
The recent state of the housing market has a significant influence on the fear of missing out, but this is for buyers and sellers. Eventually, sellers will begin to think, “I need to sell my home before the prices start to fall.” The psychology behind not acting now and missing out on the benefits others are seeing is significant. When we add this pressure to a home market, it makes it more difficult to follow the key success requirement acting responsibly when making significant financial decisions. Missing out on paying too much for a home is not a bad thing.
Should I Buy a House Now or Wait for a Recession?
Even though prices are high, you might not want to wait for a recession to come. 77% of buyers believe that there is a bubble and they see similarities between now and the 2006 housing bubble, but there are some key differences. Fifteen years ago, prices were driven by speculation and loose lending practices.
People now have not borrowed too much, and current prices are related to supply and demand issues. There are not enough homes for everyone that wants one. The 2006 bubble saw a market with lenders quite lax about underwriting loans, and real estate was an investment or speculation rather than a place to live. Loans then were different as well. Adjustable-rate mortgages with balloon payment terms were common, and mortgage payments became unaffordable. Predatory lending and financial engineering were the norms, and little equity was in place as a cushion.
Prices will likely not go down as the supply finally catches up to demand, and in the meantime, the rates may climb to the point that you can no longer afford a home that you could have previously. Just make sure to find a home that you can afford, and you are not getting in over your head or making a rash decision.
Avoid Homebuyers Remorse
Homebuyer’s remorse is more common in FOMO situations. There are a few reasons for homebuyer remorse and ways to avoid it.
- Money concerns are the first issue – paying too much for a home and the added costs for closing and the future build remorse.
- Wrong location – worry about the future of the neighborhood
- Wrong house – the grass is greener
- Too small – worry they made too many concessions
These problems can all be avoided by doing a few things.
- When your offer is accepted, stop shopping. You should not look at new homes or mortgage rates once you have started the purchase.
- Don’t nitpick your new home. If you look for faults, you will find them even if you found the perfect home.
- Revisit your wants and needs list. Keep this list handy and review it. You have strong support behind your buying decision and made it for a good reason. Don’t forget that. Stay centered and confident.
- Listen to positive opinions. Several reasonable voices will give you positive feedback about your buying decision. Ignore the negative people that don’t.
Am I Buying at the Top of the Housing Market?
Though prices might not climb at 15% a year for the next few years, they will probably not fall. As the rates climb and supply gets closer to demand, the market will balance out.
In real estate, peak new construction occurs after the peak demand, ultimately leading to an oversupply and lower prices (a bust part of the real estate cycle). We have not reached that construction peak yet, input costs have risen, and there is a shortage of home building labor. We will have to keep an eye out for how soon this changes, but until then, prices will climb.
Stocks are a leading indicator of the real estate market, and they have fallen this year. This is the first sign that slowing should happen. One thing you can do is look at what sector your region has susceptibility to. For example, if the tech market is falling significantly, then Silicon Valley/the Bay Area may have some trouble shortly, or if car sales fall significantly, then Michigan may be in for some trouble. The important thing is to buy a home that you can afford.
Is Buying a Home a Good Investment?
The short answer is, almost always. If you own a home for three years or more, you will likely pay less than you would have if you rented, and you have built equity in your home and saved on taxes. Home purchases are not good when you have let your emotions dictate the purchase, and you overpay.
Homeownership Helps Plan for the Future
Homeownership means a new level of freedom and independence. While people are waiting longer to buy, the desire to reach this milestone remains. Home prices generally increase, especially over the long term, and the equity you build is yours. When you have a fixed-rate mortgage, you know what most of your housing costs will be for many years, and you don’t have to worry about increasing rental prices. A home purchase is generally a sound investment decision. You can sell for profit or leverage the equity for other reasons. This stability allows for a much stronger financial future.
Buying a House – The American Dream
No matter what is happening in the economy, having your own home has and will continue to be the American Dream.