If the housing market worries you today, we urge patience—there will likely be a wide array of opportunities tomorrow.
The residential real estate boom of the last few years may give people of a certain age a sense of déjà vu because it’s somewhat reminiscent of the 1970s. For one, after several years of steady home price gains, many people fear they’ll miss out on further appreciation if they don’t buy a home right now. At the same time, rising inflation and interest rate fears have clouded the future economic outlook. Of course, predicting housing prices and interest rates is challenging for even the most seasoned real estate experts. Our suggestion is to avoid making any hasty decisions based on the latest headlines. Instead, turn to history for clarity and perspective.
When I began my career in 1980, older colleagues were almost unanimous in advising me and my contemporaries to buy a house immediately. The 1970s had seen rapid inflation, and home prices in our city had boomed. The notion was that if we didn’t jump to buy a house, then we would fall permanently behind existing homeowners. This was my first experience with an important emotional hurdle to successful investing: the fear of missing out (FOMO). As it turned out, the FOMO was unjustified, and there was no need for prospective purchasers to rush. There were plenty of homes to purchase at reasonable prices years later.
The advice seemed reasonable then because it was based on experience. After World War II, a unique set of circumstances favored home ownership for decades:
These factors formed the foundations of the “You’ve got to buy a house now” mantra of 1980. Times have changed. Consider how the experience of and reaction to the 2008 global financial crisis changed each of those long-standing factors:
The Case-Shiller Index of nationwide home prices has increased almost 50% in the past four years without a single monthly decline, even when COVID-19 shut down much of the economy¹. If anything, the ability to work from home during lockdown may have increased consumer desire to upgrade living spaces. Recent year-over-year increases exceed even the high points of the housing market bubble that preceded the global financial crisis and the ebullience of the late 1970s.
Recent inflation has increased the psychological appeal of making an investment in a home and helped create the FOMO mindset. The homeowner vacancy rate is at an all-time low, and total mortgage debt exceeds its high before the global financial crisis. On the other hand, the era of super-low mortgage rates appears to be past. Conventional mortgage rates have more than doubled from early 2021 lows. Combined with rising home prices, the payment for a 30-year mortgage on an average home has increased 86% in just the past year and a half².
Buying a home is an important and often emotional decision. Yet history shows that hasty decisions based on FOMO or outdated advice can result in disappointment and regret. Instead, we suggest prudent consideration of both where you want to live in the post pandemic world and what you can afford. Today’s conditions will inevitably change, and there will be a wide array of choices for you tomorrow.
Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors.
This document may contain forward-looking statements including statements regarding our intent, belief or current expectations with respect to market conditions. Readers are cautioned not to place undue reliance on these forward-looking statements. While due care has been used in the preparation of forecast information, actual results may vary in a materially positive or negative manner. Forecasts and hypothetical examples are subject to uncertainty and contingencies outside Mercer Advisors’ control.