When it comes to the housing market, it may well be the best of times and the worst of times. In most markets, housing prices are at their post-recession highs and, 11 years on, very few homeowners are underwater on their mortgages. But this also leads to a dilemma for buyers and sellers alike – prices are near highs, but the number of qualified buyers is under stress. The result is that more and more buyers are priced out of the market just when millions of baby boomers are about to start the process of scaling back.
In fact, these micro factors are reasons why many observers are having a hard time determining the outlook for the housing market. Does this mean that the average homeowner or investor is in trouble? Probably not, as most households hold less debt than they did before the last recession.
However, making sense of the housing report and its impact on the economy is difficult even when times are good. But with that in mind, here are some takeaways.
Rent or Buy?
With the exception of a few metropolitan areas, rents have softened across the country. While this is good news for consumers, it does create issues for developers. Just ask any developer who is looking at their construction daily report when they recognize that a flood of inventory is about to come on the market. The net result is falling rents, which means that some projects might not be as profitable as originally believed to be.
Add to this, the promulgation of rental control laws across the country and it might turn out that now is the best time to rent. Not convinced, then check out rents in New York which by some estimates have fallen by close to 15 percent since 2016. What’s the takeaway? Buying at peak prices when rents are falling might not be the best choice.
Interest Rate Uncertainty
If you are considering buying a property, then odds are you will need to loan to complete the purchase. This is where things could get sticky as the outlook for interest rates has been all over the board lately. The good news is that rates remain at or near all-time lows.
However, if you are considering a variable rate mortgage to help you get more house, then you could be in for a wild ride. Sure, variable-rate mortgages tend to have low introductory rates and the Federal Reserve has indicated they might start cutting rates. But do you want to risk an interest rate jump in the future?
The answer is probably no, as this is how many people got burned during the Subprime Crisis. As such, get a fixed-rate mortgage, for now, you can always refinance when there is more clarity in the market.
Just keep in mind that a fixed-rate mortgage will probably charge a slightly higher interest rate than a variable rate mortgage and this could mean that you will have to recalibrate your budget. Granted, this can be an issue when home prices are at all-time highs but when it comes to your home it is better to play it safe than sorry.
Past its Peak?
This brings us to the final piece of the puzzle – housing prices. As noted, rental prices are down in several major cities across the country, and even in a place like Ithaca, New York where the density of college students tends to distort the market. However, the cost for new or existing housing is at near-record levels across the country.
This poses a number of problems for first-time home buyers. First, how much house can they afford? While interest rates play into this, there is also the matter of determining how much you are comfortable paying on a monthly basis.
This brings us to the second problem; property taxes, as higher property values mean higher taxes even when the mill rate stays the same. Add to this, changes to the federal tax law which effectively capped the deduction homeowners could take for property taxes paid. Combined, these factors increase the total cost of ownership.
Then there is the question of timing. Should you buy now or wait until Baby Boomers begin to move out of their houses en masse? Assuming younger generations either don’t want or can’t afford the suburban homesteads of Baby Boomers, then we could be looking at a massive repricing of real estate across the country.
Either way, the experts are split on whether the housing market is past its peak or if there is still room to go. For a buyer, this means that you will need to have a clear idea of which house is right for you and for how long you want to hold it. Getting either wrong could end up costing you thousands of dollars in the long run.