Luck and timing in the housing market

I asked a little less than a year ago Are home prices in the United States becoming too expensive?

At the time, the Case Shiller National Home Price Index had just hit a new all-time high for year-over-year price gains of nearly 20%.

This means that monthly mortgage payments for average single-family home prices are at an all-time high:

But if you adjust these monthly payments for inflation, things don’t look that bad:

Adjusting for low interest rates and inflation, mortgage payments were much higher in the 1980s and 1990s.

But it’s the lower mortgage rates that really help with affordability. This is what I said at the time:

The only variable that can throw a wrench into this equation is higher mortgage rates.

In the example above, a $308,000 home with 5% mortgage rates would have a monthly payment of $1,322. A $367K house would be $1,576 a month. These are increases of about $300 per month for 3% mortgage rates.

A price hike is more effective than a price hike on your monthly payments.

If rates rise significantly, home prices are expected to fall, at least in theory.

The worst-case scenario for first-time homebuyers is higher mortgage rates while prices don’t fall. Demand will surely fall if rates rise beyond a certain threshold but I have no idea what that threshold is. There is no guarantee that home prices will fall immediately if prices rise.

Well, mortgage rates have more than doubled from those levels to more than 6%.

Let’s look at these charts just a year later. Average mortgage payments are now off the charts due to the continued increase in home prices and much higher mortgage rates:

Look at this explosion. Not good for anyone looking to buy their first home.

Now let’s see how things look based on the inflation rate:

This is the worst level of unaffordability we’ve seen since the late ’80s and it happened in the blink of an eye.1

The home ownership rate in the United States is about two-thirds:

If you’re one of the lucky people in this group who bought a home before 2022 and was insured at 3% or less, these affordability numbers don’t matter to you (unless you plan to trade in).

You are lucky to have bought or refinanced in recent years.

Let’s say you’re an older millennial and bought a home sometime between 2015-2020.

The value of your home may have increased by 40-60%. Your mortgage rate is around 3%. This means that the Fed’s short-term borrowing rate is now higher of your fixed rate mortgage, which is one of the best inflation hedges you could ask for. Your payment is steady and you’ll get richer from the boom in home prices since 2020.

But what if you’re a young millennial or Generation Z and live in a big city or you’ve missed the window to buy a house?

Your rent is rising at a rapid rate. Buying a home is now much more expensive and also somewhat unaffordable for many young people. Your best bet is to buy a place now with a high mortgage rate and hope the Fed will cut rates after sending us into recession so you can refinance. Choose a thickness.

If you happen to buy at lower prices and at lower prices then you are not a genius. you got lucky.

And if you don’t buy at lower prices and at lower prices, you are not stupid. It was bad luck.

Unfortunately, luck permeates much of your financial experience.

I ran the numbers for a $10,000 annual investment in the S&P 500, adjusted for inflation, and the results are all over the map:

The difference between the best and worst outcomes has nothing to do with an individual’s sincerely saving money and everything related to it when they were born and started saving.

If you had the bull market tailwind of the 50s, 80s, 90s or 2010s at your back, you did well in the stock market.

If you happen to start investing in the 1930s or lived through the 1970s or 2000s, not so much.

Unfortunately, a lot of what happens in your financial life is out of your control.

You have no control over what happens in the stock market, housing market, bond market, or commodity market. You cannot control inflation, interest rates, tax rates, the Federal Reserve, or any kind of financial situation you were born into.

You control the savings rate, asset allocation, diversification and business ethics.

It may not seem fair but sometimes you just have to play the cards that have been dealt.

Michael and I talked about good and bad luck in the housing market in this week’s Animal Spirits video:

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In-depth reading:
How the Fed spoiled the housing market

Now this is what I was reading recently:

1It should be noted that I only have data until July 31, 2022. Mortgage rates have gone up since then and home prices haven’t come down yet, so it just got worse.

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