Best Time to Buy in Next 5 year? Right now.
Fed gone nuts? Lets see if they have the stuff to crash the housing market
PART 1 of 2: Why “Right Now” is the best time to buy in the next 5 years.
Let’s skip the set up and jump right in. In the next 5 years, you will not find home prices cheaper than you will today. There is no massive price correction coming. There is however, a massive price appreciation correction upon us. I expect the appreciation rates to drop to 4-8% for 2023. That would be a massive correction but it would still leave buyers who wait paying substantially higher for the same property.
“But interest rates are so high right now” I hear you say… Rates can only go one of two ways. Up or Down. If they go up, then getting locked in now would leave you feeling pretty skippy. If interest rates do come down, all you need to do is refinance. Getting rate FOMO is common and understandable occurrence, especially in this recessionary environment when all the finical spidy-senses are tingling. When it comes to your primary residence do not allow “interest rate tunnel vision” blind you from the most important aspect of real estate. Store of value that has functional utility. In 1982 when rates spiked around 17%, home prices did not fall, they went up (even if by a small margin).
“But my monthly payment would be so much more!” you angrily retort… OK fair, but let’s keep pulling on that string: If you buy a house for $500,000 with 20% down that would give you a loan amount of $400,000. Your loan term is 30 years at 5.3% interest rate (for this example). The monthly payment would be $2,221.22 (at 5.3%). Now let’s hop in the time machine and get you that JUCY 2.7% interest rate and see how it changes the payment. The new payment at 2.7% would be $1,622.39 / month. That gives you a difference in payment of $598 / month (or $7,176 per year). Getting a lower rate is always better (no argument on that), but it is not the most important part of the equation… Now compare that extra $7,176 cost per year (due to the higher interest rate of 5.3%) vs the total price appreciation in that same year. Let’s be conservative and use 6.5% annual price appreciation: $5000,000 (purchase price) x .065 (price appreciation)= $32,000. Now subtract the two numbers: $32,000-$7,176= $25,324. That leaves you with a total net gain for the year of 25k. If you invested 7k in the stock market and one year later it had grown to 32k would you be happy?
More concisely, the equity gain/price appreciation should far outpace the delta on any interest rate spread (within reason, obviously). The longer you wait to buy, the more money you will be spending even if interest rates do drop. Comparing monthly cost is helpful, but your house is an asset and should be viewed as such. Focusing only on monthly payments and not the future price of the asset is not a wholistic approach to your biggest (for most) investment.
Inventory is still a problem and a major factor in all of this. In Part 2 of this series“Best time to sell in the next 5 years? Right now.” we will take a deeper look at the impact low inventory is having. For now, simply understanding that a home being on the market 15 days does not indicate an impending collapse (of the market). There was once a time, and there will be a time very soon that this is normal. Market participants (buyers, sells, investors, and agents) as a whole have had their perspectives morphed by a market that had gone super-nova. The correction is upon us but you wont see anything on discount anytime soon. However you should see plenty of price drops as over exuberant sellers get brought up to speed on the current situation.
Final thought
There is another hard and scarce asset that is Being Traded Currently at a steep discount. I would buy lots of that too but for now we can keep it real estate. Thanks for reading and supporting the project.