It’s been a busy couple of months! Between trying to finish up my book and recently getting an offer accepted on a house, I haven’t had time to actually finish a blog post. Part of me still doesn’t believe it’s real after our previous attempt to buy a home exactly a year ago ended with us walking away from a money pit.
I’ve been posting quite a bit for over two years about how I thought there was a housing bubble in the United States:
- November 2020: “Don’t Fall for Home Ownership FOMO During the Pandemic“
- January 2022: “Investing During the Everything Bubble“
- March 2022: “The Honest History of Home Prices and Mortgage Rates“
- April 2022: “The Best Method for Saving a Down Payment Amid High Inflation“
- July 2022: “How Lagging, Selectively Represented Data Hides A Shifting Housing Market“
- October 2022: “Fall 2022 Housing Affordability Update: Looking Worse Than 2008“
I wrote the following in the April 2022 article:
I’m going on the record calling a top in the housing market in the coming weeks. That is the conclusion that all data analysis and rational thinking has led me toward since I started researching and heavily investigating The Everything Bubble. It’s not going to be a 2008-tier crash, but it’s not going to be the “soft landing” that The Fed wants people to believe they can engineer after they poured octane on the fire for two years straight. Also, it will be fun to make an official “market timing” declaration and come back to revisit and reflect on this article in the future.
The above ended up being true — the median home sale price in my area peaked in June 2022 according to Redfin’s data, and fell 13.2% from that point to close out the year. However, because 30 year mortgage rates also increased from the mid-5’s to the mid-6’s, effectively zero affordability was gained by people waiting on the sidelines, as shown by this chart from Redfin of the average monthly mortgage payment:
These mortgage rates have definitely reduced demand somewhat, as the number of weeks of inventory in our market has been steadily increasing, but still remains below 2020 (pre-pandemic) levels. Additionally, the number of active listings is lower than any year except for 2022. The percentage of active listings with price drops has also fallen though, to around half of what it was during last summer and fall, indicating that the vast majority of sellers are getting what they ask for (or more) when they list their home.
Poking around at open houses in early February, we noted that it seemed a lot of buyers had come back out to get an early start on the spring market. The open houses were mobbed, especially four bedroom homes, and even in price ranges up to $700k — a price bracket that I originally thought would have been heavily crippled by these mortgage rates.
Essentially it seems that the 13% price reduction from the peak in our market was due to the combination of a return to winter seasonality and higher mortgage rates. However without a surge of inventory, my best guess is that our market will stagnate around this level, with a few people willing and able to pay these prices even at nearly 7% mortgage rates. There’s really no chance of Greater Boston building their way out of an inventory slump, so really the only hope of more inventory seems to be a bunch of people motivated to sell by things such as widespread layoffs.
Seeing the activity at open houses that was reminiscent of spring 2021 and spring 2022 — which both saw prices climb over 20% in our area before hitting their summer peak — we were faced with the decision that the housing correction we’ve been hoping for may not materialize in our area. We’ve been wrong for over two years thinking the top is just around the corner, and the risk of being wrong for another year could mean paying even more for a home a year or two down the road.
So when a potential forever home came on the market that we thought was underpriced, we did what we had to do to buy it. There ended up being nearly 20 other offers and we had to bid about 10% over and waive everything to “win.” Even bidding over though, we got an excellent price per square foot. I think if the sellers listed higher, they could have gotten even more for the house from somebody else, and we definitely got a lower price than the home would have sold for in summer 2022.
I previously declared that I would never waive an inspection but the market has really ground my principles down. It’s nearly impossible to compete against a multitude of offers waiving inspections; in the past we’ve tried things like offering to waive the first $10,000 of any inspection findings to protect ourselves only from catastrophic situations, but the majority of times we offered on homes we would lose out to people doing an “info only” inspection or waiving it entirely. At least this house doesn’t have a crawlspace like the one we backed out of. We did our best to make sure the basement and attic looked dry and free of rot or mold.
The financials of our decision
In the end, the purchase price of the home is about 2.25 times our gross income, and we ended up with a mortgage rate about 1% below prevailing 30 year mortgage rates by going with a local credit union that will service our loan versus selling it. So I think in the worst case, this could turn out to be a dumb decision, but not a financially reckless one.
Since we are putting 20% down and have low debt-to-income, the underwriter waived the appraisal on behalf of the bank. So this eliminated any immediate financial risk of needing to bring extra cash to the table to make up for a potential appraisal gap at closing, allowing us to waive it in our offer to compete with other people doing the same thing.
Our PITI (principal, interest, taxes, and insurance) for the home will be around $3,500 per month. This is a significant increase in housing costs over our one bedroom apartment for $2,370 per month. However we have been wanting more space for several years, and if we were to upgrade to a 2 bedroom apartment it would cost $3,000 per month in rent.
Using an amortization calculator shows that our first mortgage payment will generate about $500 going towards the principal of the loan. However, this does not bring the cost of home ownership on par with renting the 2 bedroom apartment due to the numerous other costs that come with home ownership such as:
- Maintenance
- Higher utility bills for a larger space
- Cost for upgrades and improvements, if desired or needed
- Opportunity cost of not investing your down payment
I’m under no illusions that owning a home won’t be significantly more expensive than renting, especially for the first couple of years as we seek to slowly update the very outdated finishes. And obviously we’ve exposed ourselves to quite a bit of financial risk by waiving the inspection, since as a layman armed with the knowledge from just one previous home inspection I’m only able to spot a few of the egregious issues we had pop up on our last offer. We do have a trusted family member who is an inspector, so after we close he’ll be able to come in and tell us whether we’re idiots or not.
We do want to stay in this area long-term, so I’m hopeful that time and inflation will dull any negative impacts of our decision. It’s possible we could look back in 5 years and realize that our mortgage is now the same or lower than rent on a smaller 2 bedroom apartment, especially if mortgage rates drop at some point and we’re able to refinance.
Sometimes you just have to take a calculated risk in life.
Final thoughts
My personal experience has now confirmed that one cannot successfully time any asset market, no matter how nonsensical and overvalued it may seem.
I’m reminded of the famous “irrational exuberance” comment proclaimed by former Fed Chair Alan Greenspan in a speech on December 5, 1996:
Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?
Alan Greenspan, “The Challenge of Central Banking in a Democratic Society“
The day of his speech, the S&P 500 index had a value of 744. However, we all know that the market continued to steadily climb upwards until 2000, when the tech bubble burst. The lowest point in the ensuing collapse was on October 9, 2002, when the index had a value of 776, still higher than when Greenspan made his comments nearly 4 years earlier.
Greenspan saw the dot-com bubble brewing, but being right at the wrong time is just a padded euphemism for being wrong. I still believe that the housing market is overvalued from an affordability (or lack thereof) perspective as affordability is empirically worse for the median household than 2008, but it’s clear to me now that I was wrong thinking that alone is a sufficient reason for an impending housing correction.
In traditionally desirable markets like Greater Boston, it’s unclear where the simultaneous surge of supply and destruction of buyer demand would come from, besides a recession. And that could take years to develop and correct the housing market. Meanwhile someone who just buys now will be 10% of the way towards paying off their mortgage in 3 years.
Good luck out there to those who are still looking for a house, or waiting to see what happens. I’m not convinced that buying now is the optimal decision, but I’m also not sure that I would have ever had the requisite information to make a completely optimal decision. We’ve always wanted a live-in fixer-upper so we can make a house exactly to our tastes over a couple of years, and as we’re both pushing 30 it didn’t really seem right to keep putting our life milestones on hold indefinitely.