What to Consider When Buying Your First Home – Billionaire Andrew Carnegie famously said that 90% of millionaires got their wealth by investing in real estate. Not a single industry produced more millionaires than real estate because it’s the easiest and simplest way to accumulate wealth. In the year 2000, the average home price was $119,600. Today, in 2021, the average house price has grown to $374,900. So, most people who took a 30-year-old mortgage to buy a 300-400k dollar house are already millionaires.
In 1980, the average house price was $47,200. In the long, house prices do not only beat inflation but rise significantly. Yeah, a crash is bad, but if you are a long-term investor, the crash doesn’t matter because prices will bounce back right where there have been and keep rising. However, since March 2020, the housing market has been going through a wild ride. Prices have risen by almost 25 percent since then, which has led many people to think that we might be in a housing bubble. And a housing bubble means that sooner or later, it’s going to burst.
We have already talked about why the market could crash? Why are we in a bubble? And how could it end up driving the entire economy down? However, not everyone agrees with this opinion. There are plenty of respectful people who believe that we are not in a bubble and the rise is natural. Yeah, sooner or later, this boom will stop, but it’s not going to crash since the rise this time is nothing like the 2008 crash. We no longer have predatory lending, and most mortgages are given to responsible buyers and so on.
What to Consider When Buying Your First Home
They have a point. There are many reasons why the housing market may not crash. So let’s take a look at why the housing crash is not happening, at least this year. Because to make an objective opinion, it’s important to look at it from an opposite point of view.
The number one reason that house prices rose so much was because of short supply when there was a huge demand. That’s basic economics.
In fact, in 2020, there haven’t been many houses built, and covid restrictions have only slowed down the construction. And that not just because contractions couldn’t resume due to the pandemic but entire supply chains have been damaged. Some places entirely shut down, others couldn’t get their employees back to the factories, and so on, while the demand kept rising due to super-low mortgage rates. Just look at the data. The sharp fall in the supply of houses hasn’t even recovered to the pre-pandemic levels. When too much money chases too few houses, house prices rise that much.
But why can’t they build more houses? Because it’s difficult to do that during the pandemic and secondly since the 2008 crash, this industry has slowed down dramatically, and you can’t pomp it up instantly, especially during a global pandemic. And that’s what makes this housing boom so different from the last crisis. Take a look at the supply of houses in 2007 and 2008. At its peak, it was twice more than it’s now. That’s why it crashed. There was an oversupply of houses.
Sellers had to keep reducing prices to find a buyer, especially when they defaulted on their mortgages. Today, the situation is different. The astronomical demand may have ended, but even if prices drop slightly, there are plenty of people who are ready to buy a house. So experts see two ways out of this situation. Price just stabilizes and stays where they are for the next few years or so or drop slightly but quickly bounce back since interest rates are still low enough to encourage demand.
The chairman of the fed hinted that the fed is not planning to raise the rates any time soon. And that’s not unusual because it’s normal for the fed to keep the rates low for a few years when a crisis hits the economy. After the 2008 crash, the fed kept interest rates low for the next 7 years, so it’s entirely possible that rates won’t rise at least in the next 2 to 3 years.
Thirdly, there is a huge difference between a boom and a bubble. There are periods when the economy recovers from crises and experiences a boom, so asset prices rise dramatically, especially when there is a limited supply of that asset in the market. A boom doesn’t necessarily mean a bubble. Theoretically, it could turn into a bubble but that’s not always the case, and judging by the facts, it doesn’t seem like it’s a bubble now due to the reasons we have talked about earlier.
But you might say there are still millions under the forbearance program. Once it ends, millions of Americans won’t be able to keep up with their mortgage payments which means, there will be millions of houses for sale in the market which means, home prices will fall instantly. You have got the point, but the data says otherwise.
At the height of the forbearance program, 9.3 million mortgages were in forbearance. If it wasn’t for the forbearance program, the market would have collapsed long ago. But today, that number is far smaller. According to the Mortgage Bankers Association, approximately 1.7 million homeowners remain in some type of mortgage forbearance plan.
Of course, if those buyers face foreclosure or simply opt to sell rather than restart payments, then it could cause the number of homes for sale to rise. But even that is unlikely because a huge chunk of them are there because they want to take maximum advantage out of this program.
The mortgages that have been given after the 2008 crash are very different to pre 2008 crash. Banks are heavily regulated since then and strictly provide loans only to those who are responsible enough not to default and can keep up with their payments. But even if hypothetically most of them default on their mortgages when the forbearance program ends, that would only cause a temporary 11% rise in inventory. But low-interest rates will quickly push people to buy those houses.
There won’t be bidding wars as we saw thought last year when people overpaid for over a million dollars just to outbid everyone else, which is not super smart, because your property most likely won’t appreciate in the next few years. On top of that, judging by how many times the government extended the forbearance program, it seems like it will be doing everything possible to prevent homeowners from defaulting, even if that means extending the program to 2022.
The arguments against crashes sound legit, and that’s exactly what could happen. No one knows the future, and every prediction has a 50/50 chance. But if we go back to 2007, 2006 or 5. There were plenty of economics professors who gave us multiple reasons why the housing won’t crash. I mean, America’s largest financial companies, such as AIG and Lehman Brothers, have bet hundreds of billions of dollars against the housing crash since they were so confident that it’s not going to crash. I am not saying just because they were wrong last time, they are wrong this time, but these opinions should be taken with a drop of skepticism.
What we also should consider the Nature of every crisis is different. These 2 crises are not identical. Yes, they all follow some similar patterns, but they are not clear before the crisis, and they happen due to different reasons. So comparing the last housing crash to the next one isn’t wise. If we knew exactly how all crises happen, we would have figured how to solve them long ago, but we only have learned how to soften them.