[Editor’s Note: A big thank you to Josh Mettle with Fairway Independent Mortgage for being one of the Platinum sponsors of the White Coat Investor Scholarship program. As part of the sponsorship package, Josh gets to submit a sponsored post. As a reminder, all money raised in this contest is given away to the scholarship winners. Thank you for supporting those who support this site and this scholarship. Josh has been a long-time sponsor of the site and occasionally a guest post contributor. In this post, he addresses a controversial topic that even some WCI staff have been wrestling with lately- Should you buy a house after a long run-up in prices even if now is the right time in your life for you to buy?]
This Real Estate Bubble – Likely Isn’t a Bubble: 11 Data-Driven Reasons Why You Should Buy Your Dream Home Immediately
Earlier this year I sat as an attendee at the WCI conference, also known as the Physician Wellness and Financial Literacy Conference in Park City, UT. I was approached by a physician attendee who recognized me and asked: “Josh – when will the real estate bubble pop?”
He went on to explain that his young family had outgrown their home and were uncomfortably waiting for the next real estate crash to come before moving up to his dream home, or at least a home that would fit his growing family. I asked him, “Why do you believe we are in another real estate bubble?”
His answer was surprising to me, he had swallowed the myth that today’s real estate prices (which are the highest ever in most areas of the country) were evidence we are near the next cliff and a crash is imminent.
I was puzzled that he had not sought more data-driven reasons to arrive at his conclusion, and the idea for this article was born. I’m grateful for WCI to give me the opportunity to answer his questions, and yours, in a data-driven format.
If you’re like many doctors I speak with, you probably believe we are on the brink of a real estate crash and you are asking yourself if you should try to time the market or buy now. Here are a few of the common myths about the current real estate situation that many people believe:
Prices are at an all-time high, we must be near the top!
The market is just too hot, I’m going to wait it out a few years until it cools and I can get a better deal!
There is no way all those people can realistically afford homes – a crash is imminent!
However, if you look at the data and the current economic situation, you’ll quickly realize how different the current environment is from where we were in 2008 (the last time home prices were at an all-time high).
The problem with the emphatic statements above is that they are myths, and they may be stopping you from living the life you want.
By the end of this article, you’ll realize that it’s not a bad idea to move up to a bigger, better, more comfortable home. Instead, you’ll realize that you should buy that dream house right now if it fits in your budget.
Reason #1: Housing is MORE affordable today than it has been over the last 20 years!
The vast majority of the country has lower monthly housing payments relative to median income today than during the previous twenty years. Today the national payment to income ratio is at 22.8%, meaning that on average, homeowners are paying 22.8% of their gross income to cover their monthly housing expenses (principle, interest, taxes, and insurance). You can see from 2000 to 2007 that ratio exploded upwards to 34.6%, which in hindsight was clearly not sustainable. Today’s payment to income ratio is clearly lower than historical norms for two reasons.
- Interest rates today are still well below historical averages (the 30-year average rate going back to 1965 is approximately 7.75%)
- Median income has been increasing over the last few years
With incomes rising and interest rates still well below historical norms, housing is relatively affordable for most areas of the country.
There are certainly exceptions to the national averages. California, Washington D.C., New York, Delaware, Maine, and Oregon are well above the 25% payment to income ratio historical averages and very well may near be reaching their cyclical top in prices, unless income growth in those states continue to rise quickly it is likely real estate appreciation will slow or even dip for a period of time.
That does not mean a crash is imminent, it means I would be more cautious buying in those areas, I would want to be confident I was going to live in the home for five to ten years, and I would not want to stretch myself beyond what is comfortable for a payment.
“The Debt Service Ratio for mortgages is near the low for the last 38 years. This ratio increased rapidly during the housing bubble, and continued to increase until 2007. With falling interest rates, and less mortgage debt, the mortgage ratio has declined significantly.” –Calculated Risk
Reason #2: A strong U.S. Economy is churning out well-qualified buyers.
To buy a home, you need income and for most of us, that means a job. Since the Great Recession, the U.S. has been consistently creating jobs, over the last twelve months 2.28 million net new jobs have been created.
Having a job alone isn’t enough. You have to have a well-paying job to afford a home in most places. The data on earnings shows that all those new jobs are forcing employers to compete for talent by increasing hourly earnings.
We now have more people working and they’re earning more money than they were before the last crash, thus they can afford housing at a higher price.
“Even though CoreLogic’s national home price index got to the same level it was at the prior peak in April of 2016, once you account for inflation over the ensuing 11.5 years, values are still about 18% below where they were.” – Dr. Frank Nothaft – CoreLogic Chief Economist
As a Utah resident, I’m happy to say job growth has been particularly good in Western states. It stands to reason the states with the quickest pace of job growth will also be the states with the most competition for housing and likely the highest rates of real estate appreciation in the coming years.
Reason #3: Existing home inventory levels are low relative to the number of qualified buyers.
The U.S. economy has added 2.28M net new jobs in the most recent twelve month period, meanwhile, there has only been 1.16M new dwelling building permits pulled. Over the last year, the U.S has created 1.97 net new jobs for every one dwelling being built. Historically that average has been closer to 1.25 to 1.5 new jobs created for every new housing unit.
Clearly, home builders are not building fast enough to keep up with the demand coming from new job creation. Until builders catch up, we will have greater demand for housing that we have supply, and home prices should continue to rise in most areas of the country, especially those areas with quickly expanding economies.
As of May 2018, the U.S. Bureau of the Census reports a 5.2-month inventory of homes in the U.S. The months’ supply indicates how long the current inventory of homes for sale would last at the current sales rate if no new additional homes were built.
Looking at the graph below, clearly, we are not in an oversupply situation like we were before the crash. Once the supply level approaches seven months’ supply, I start to get nervous.
Reason #4: Mortgage credit standards are near an all-time high.
It’s no secret the Mortgage Meltdown and the ensuing Great Recession were fueled by cheap, easy credit, with little if any consideration to the borrower’s ability to realistically make on-time payments and pay the loan down over time.
Years of real estate appreciation had warped the minds of credit policymakers and borrowers alike, the accepted dogma was that real estate only went up, why worry about a borrower’s ability to repay, they can always sell or refinance the debt.
That didn’t work out so well…
Today, however, underwriting standards are tight as a tick. Clients need solid credit, documented two-year history of income, a reasonable assessment of the likeliness of that income continuing, and down payment funds must be verified as the clients’ own.
Mortgage credit standards are measured in mass by a couple of different organizations, both have similar findings. Today underwriting standards if anything are too strenuous.
The Urban Institute measures default risk and states a level of twelve percent is reasonable on their modeling system. Today we are near six percent, meaning they believe we could double default risk and still be within their reasonable tolerances.
The Mortgage Bankers Association measures similar credit and underwriting standards with their Mortgage Credit Availability Index. This index measures how easy or difficult it is to obtain mortgage financing, the higher the score the easier, the lower the score the more difficult to obtain credit.
As you might have guessed, the index blew its top off approaching a 900 on the index in the years preceding the 2006 real estate bubble that lead to the Mortgage Meltdown. As delinquency rates started to increase, lenders quickly got their wits about them and started tightening credit standards.
That was a lot like watching a toilet flush. As credit standards tightened, those owning property with no chance of paying, those with the assumption real estate would always go up, which afforded them options to refinance and pull cash out or sell at a higher price, had their dreams crushed and titles to their homes taken away.
The Mortgage Credit Availability Index bottomed just below 100 in 2011 and as of March 2018 has not yet hit 200. Today’s buyers are legit, they have income, credit, assets, full appraisals to set valuations, and qualify to actually pay back the mortgage debts they are taking out.
Reason #5: Mortgage loan delinquencies are near record lows.
Not surprisingly after 10 years of incredibly tight mortgage lending standards, mortgage loans are performing incredibly well. Delinquencies and defaults are near an all-time low, which speaks to the overall strength of the real estate and mortgage market.
It appears mortgage lenders have learned their lesson and nearly a decade after the bottom of the Meltdown; tight lending standards accomplished their goal of keeping delinquencies low. Currently, mortgage foreclosure rates are about one percent.
“Unemployment and lack of home equity are two factors that can lead to borrowers defaulting on their mortgages. Unemployment is at the lowest level in 18 years and for the first quarter, the CoreLogic Equity Report revealed record levels of home equity growth with equity per owner up $16,300 on average for the year ending March 2018.” – Dr. Frank Nothaft – Chief Economist at CoreLogic
Reason #6: Americans are sitting in $5.42 Trillion of tappable equity.
One of the things that led to the Mortgage Meltdown and Great Recession was that Americans were using their homes like cash registers, constantly pulling out cash every few years, and far too few had substantial equity in their homes when the economy slowed.
That is exactly the opposite of what we are seeing today.
Black Night just reported that Americans are sitting on a record amount of tappable equity, currently estimated to be in excess of $5,420,000,000,000 ($5.42 Trillion in tappable equity).
Tappable equity is defined as the amount of equity between your current mortgage balance and eighty percent of the current value of your home. For example, if you owe three hundred thousand on your home and your home is worth five hundred thousand, you would have one hundred thousand of tappable equity. This is equity that is easily accessible with a HELOC (home equity line of credit) or a new first mortgage.
Unlike the previous real estate run up from 2002 to 2006, Americans are not yet tapping their equity. In fact, Americans are paying down their mortgage balances at record levels which has led to record amounts of tappable equity creation, estimated at $381 Billion in the first quarter of 2018 alone. That is an incredible amount of wealth being created in three months!
Record amounts of tappable equity could be bullish for small business owners and the U.S. economy as a whole, this equity is a potential source of investment in new businesses or it could be utilized to restructure higher interest rate debts. It also tells us that Americans are being judicious with their home equity and thus far are not treating their home equity like an ATM machine.
Reason #7: The luxury home market has not seen the run-up in prices that starter and mid-level homes have.
The housing recovery began at the starter home level and was aided by significant first-time homebuyer tax credits and record low-interest rates. As demand grew from the bottom up so has the rate of real estate appreciation that has not been balanced since the recovery began.
CoreLogic reports low-end homes have appreciated by fifty-five percent, while high-end homes have only appreciated by thirty percent since 2013. It is unusual that low-end homes would appreciate eighty-three percent greater than high-end homes; it is a trend that will not continue forever.
We are seeing signs the high-end real estate marketing is coming to life. Premium home searches now make up over forty-one percent of all home searches online and luxury homes days on market is at the lowest levels in over a year.
One potential explanation is that middle and low-end homeowners have seen considerable equity gains over the last decade and are now able to sell for substantial gains and buy with significant down payments. Couple those large down payments with a strong economy and rising wages, its logical more buyers would be showing up in the luxury market.
Bloomberg reports high-end homes in premium markets across the country have surged over the last year. In many areas across the country, this trend is just starting and the high-end appreciation has not yet caught up to the low end and middle range homes.
“Median home values nationally rose eight percent in March compared with a year earlier, while neighborhoods of San Francisco and San Jose, California, have increased more than 25 percent.
Prices in Delaware and New York, such as the Hamptons, also surged more than twenty percent.” -Blomberg News
This may be an opportunity to sell in a middle market that has seen significant gains and buy in a high-end market that is yet to see the run-up in values. Every market is different and these opportunities may not exist where you live, if you are considering moving up, it’s worth checking with a local REALTOR to determine if your location has seen this similar split market with the low to mid-range homes leading the way with appreciation thus far.
Reason #8: Rising interest rates are not likely to kill the real estate market.
The Federal Reserve conducted the largest monetary policy experiment in history, commonly known as the QE (quantitative easing) program, and resulting in the U.S. central bank holding a massive $4.5 trillion portfolio of U.S. Treasuries and mortgage bonds. QE began in 2008 and officially concluded in 2014; however, the income from the QE investments continued to be rolled into new bond purchases until late 2017.
Since the Fed exited the market as a net buyer of mortgage bonds, interest rates have moved higher leading some to believe that higher interest rates will put an end to real estate appreciation. While it is clear that long-term mortgage rates have reversed their thirty plus year trend lower, it is not yet clear the higher rate trend will negatively impact real estate values. Surprisingly to most people, thus far the opposite has happened.
Home price appreciation has accelerated as interest rates have been rising throughout 2018. While this is somewhat counterintuitive, interest rates tend to rise in good economic times, when unemployment is low and the economy and wages are rising. The wave of qualified buyers and limited supply of homes for sale has overpowered rising interest rates thus far.
“Constrained home supply, persistent demand, very low unemployment, and steady economic growth have given a jolt to the near-term outlook for U.S. home prices. These conditions are overshadowing concerns that mortgage rate increases expected this year might quash the appetite of prospective home buyers.” – Terry Loebs – Founder Pulsenomics
Interestingly this is not the first time higher interest rates have accompanied rapid real estate appreciation, as a matter of fact; the last six times mortgage rates increased by more than one percent, residential real estate prices increased.
Reason #9: Homeownership rates are beginning to turn higher.
After more than a decade of declining homeownership rates, owning the real estate Americans inhabit is regaining its allure. The official homeownership rate peak was at 69.2% in 2005. As credit standards began to tighten, many were no longer able to qualify for financing, and soon thereafter the real estate crash was upon us.
The parents that lost their homes and the children who remember their parents going through that unsavory experience both had a bad taste for owning real estate. Many had decided never to buy a home and that renting was going to be a better choice for them.
We are now nine years into the real estate recovery and it appears consumer sentiment towards owning real estate is starting to change. Not only has the homeownership rate bottomed and begun its ascent higher for the last two years, Gallup also recently reported that one out of three Americans believe that owning real estate is the best long-term investment.
It appears the emotional scars that were left by the Mortgage Meltdown and Great Recession may just now be healing for some. As the scary memories of being foreclosed upon subside and Americans return to homeownership, it’s likely we see more buyers enter the market in the coming years.
Reason #10: Recession does not equal a housing crisis!
Our country has experienced economic growth for almost a decade. Economic expansion cannot happen forever, the economy will need to take a breather at some point and most analysts believe a recession can’t be too far off.
“Experts largely expect the next recession to begin in 2020.” – Pulsenomics
“The economic expansion that began in mid-2009 and already ranks as the second-longest in American history most likely will end in 2020 as the Federal Reserve raises interest rates to cool off an overheating economy, according to forecasters surveyed.” – Wall Street Journal
Here is a graph comparing the opinions of those surveyed by both the Wall Street Journal and Pulsenomics:
According to the Merriam-Webster Dictionary, a recession is defined as follows:
“A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.”
During times of recessions, the economy slows noticeably, but that does not mean we are headed for another housing crisis. The last housing crisis was a result of fake demand that was a false signal to homebuilders to massively increase the number of homes they were building.
That fake demand stemmed from cheap and easy credit, which fueled the greed in all parties involved and eventually led to a massive oversupply of homes and the eventual crash.
Today lending standards are solid (maybe too much so) and the demand for housing is real. Homebuilders thus far cannot keep up with demand and we have a housing shortage.
Today’s situation is the polar opposite of what we saw before the last crash. It is highly unlikely that the next recession leads us into another real estate crash. In fact, looking back forty five years and six recessions, housing prices continued to appreciate in all but one recessionary period.
“If a recession is to occur, it is unlikely to be caused by housing-related activity, and therefore the housing sector should be one of the leading sources to come out of the recession.” – Mark Fleming – Chief Economist First American
Bottom line, an economic recession may be likely in the coming years, but a full-blown housing crisis is very unlikely.
Reason #11: Buying your dream home is not about money – it’s about enjoying your lifestyle!
As I wrote this article, I’ve simultaneously been emailing my architect who is helping my family design our new home. I’ve been in my current home since 2010 and when I bought it, I thought I would never move, this was definitely going to be our forever home I thought. It’s in a great neighborhood, killer views, and after eight years of work, we have it fixed up and looking exactly like we want it. Time to move!
As my kids have gotten older and my personal taste and preferences have changes, I’ve started to want to be outdoors more. Instead of living in the thick of it, I want to watch it from afar. I want my kids to grow up on streams, trails and mountain bikes instead of PlayStations and iPhones.
So we are leaving the “forever house” for the next “forever house”, one that I believe will enable me to create deeper relationships with my kids before they take off for college and begin their own journey in life.
This does not mean that I think you should overspend and pray that real estate will go up forever. We all know that real estate is going to have its ups and downs; the longer you hold real estate the higher the probability you have of time protecting you against short-term zigs and zags of the market.
One last word of advice as you consider buying your dream home, one that better fits your lifestyle and family for decades to come. Do not overspend! Do not put yourself in a situation where your home turns into a financial burden that detracts from your lifestyle, your ability to be a great spouse or parent and practice your profession the way you want to.
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I personally have never bought a home that cost more than twice my annual income (and that is my max budget for my new forever home as well). I tell clients that two to three times your annual income, in my opinion, should be the limit, especially when you have kids, college, weddings, and retirement coming faster than most of us realize.
In closing, my advice is to live life without fear that another real estate crash is coming, but in doing so, do not forget what brought about the last real estate crash.
Happy house hunting!
Josh Mettle NMLS #219996 is an industry leading author and mortgage lender, specializing in financing physicians, dentists, CRNA, and physician assistants. You can get more great physician real estate and mortgage advice here or his by visiting his book site. Josh is also a fourth generation real estate investor, and owns a number of rental homes, apartment units and mortgages. Josh is dedicated to helping physicians become more financially aware and able; listen to “Physician Financial Success” podcast episodes or download Josh’s latest tips and advice here.
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Do you think we're in a housing bubble about to crash after reviewing the data presented? Or, are you more inclined to buy that dream home? Comment below, and please thank Josh and Fairway Independent for their generous donation to the scholarship fund!
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You act like the 2008 crash was blatantly apparent by several cherry picked data points. Nobodytruly knows if we’re In a bubble or not, but plenty of economists would disagree with your entire post. But they’re not biased by currently being in the process of building their dream home 😉
Just to add further, this entire post seems to go against the entire ethos of this website (time to upgrade that middle class house into your luxury mansion while you still can! YOLO). kind shocked this material makes it on the front page
“we offer five “Platinum Level” sponsorships to businesses that donate over $5000. In return, each of these Platinum Level Sponsors is given full editorial control to write a post on any topic they’d like, including promoting their business! ”
Everyone has a price! (Not that I blame them!)
Who has a price? In this case the $5000 donation seems like it is given away in scholarships.
Exactly.
Why are you guys being so mean? It reminds me of the comments below the scholarship winners’ posts each year (not this year, they’ll be disabled due to too many comments like these showing up there in past years.) I try to raise a little money to give away to medical/dental/other professional students. I give some good businesses I’ve vetted and personally used some publicity. They put together a post that’s interesting to discuss, whether you agree with it or not. It costs you nothing to read it. I am 100% transparent about what’s going on with the post and I keep not a dime of the money (and in fact am donating $15-20K worth of cash, prizes and services from my own pocket to the contest.)
Show some class. It’s only 5 posts all year. What you don’t realize is a huge percentage of the blogs out there are running sponsored posts all the time and keeping the cash for themselves without even telling you what’s going on. If readers were donating tons of money to the contest each year I wouldn’t bother raising money from industry. But guess what? All 150,000 readers combined don’t donate as much each year as ONE of the platinum sponsors. So we’re going to keep doing some sponsored posts to help raise money. Why not just say “Thank you for supporting the scholarship”?
Despite all the craziness that this post brought out in comments, I appreciate the post and still love the comments section. I disagree with much of it the post but it was actually a quite thorough post. I would thank Josh “Heavy” Mettle for donating to a good cause. Although he has much more experience in the real estate sector than I do, I am much more of a bear on the overall economy. As go the economy so go the real estate sector….to some extent.
Thanks,
I’m going to start calling him “Heavy”, that’s awesome!
Agree. Huge conflict of interest! Written by a guy who runs the mortgage firm. Needs to be interpreted carefully.
Good thing you pointed that out down here in the comments, because that information wasn’t in the first line of the editor’s note on the post. Oh wait, it was. Seriously people, today you are attending a fundraiser that you didn’t even have to pay to attend. Try to enjoy yourselves.
I’m on the skeptical side about this too, but to be fair to the author, he does say to live within your means and buy at no more than 2-3x your income. I think that’s pretty consistent with WCI. I think this post is all about not being afraid to live your life and buy a home just because you’re afraid of recession/you’re trying to time the market. I’m pretty sure WCI supports the idea that we’re all terrible at market timing and it’s largely a waste of effort.
Louis you nailed it. The article is not to convince people to overspend, the article is aimed at the folks whom are living in fear about a crash and will end up buying next year at higher prices and interest rates are likely going to be higher.
I lived through the 2006 to 2010 run up and crash, talking to clients and taking applications every day…
Today’s buyer is totally different (they actually qualify for a loan) and the numbers in the post above speak to that. Again not my intention to convince anyone to spend more than what is reasonable for their budget and income.
Thanks for your response!
but what about the fact that lending restrictions are even LESS then they were back in ’08, and that there’s even less private capital at stake with sub prime loans than it was back then (so more public money involved)? Subprime loans are still around, and are still driving the housing market, and the financial sector is still pouring money into securities that are backed by sub prime loans…so how is it different this time?
Interesting essay, but generally the issue at WCI is whether the physician is financially ready to buy a big house, not whether the market is appropriate. I have not read much about trying to time the real estate market in the decision whether to buy a house, but my initial reaction would be you probably can’t time it any better than you can time the stock market.
The comment that a new house ” will enable me to create deeper relationships with my kids” seemed off. For physicians (and probably everybody else) just being around your kids is a lot more important than the house you are in. The trouble is usually finding the time and not finding the money. Some of the best memories with my kids were in a little 1400 sq ft house that was what I could afford at the time.
Of course the article should be read keeping the author’s incentives in mind. The income to payment ratio is helpful data, but it would be much more helpful if he were able to go back further in time or if salary to price data was included. Also, it would be great if he included data on historical cap rates. I would think cap rate would be a great indicator of bubbles. Even though my suggestions complicate the authors likely bias with mortgage rates, it would make a more complete article. Either way I thank the author for a helpful perspective.
Josh is definitely a “perma-bull” when it comes to buying real estate, some of that may be working in the industry, but part of that is because he’s seen a lot of success doing so as a real estate investor and lives in an area of the country where buying has paid off very well, particularly recently.
I agree that more data is always nice to see.
easy to be a perma-bull if you are talking cash flowing real estate
A primary residence doesnt cash flow , that being said in environment of likely rising rates – if contemplating move would roll up into larger property now rather than in 18-24 months.
I favor: Invest in cash flowing multi-units not a mega mansion
About to buy a 32 unit deal – cash flow from day 1 and pay down mortgage that returns 15% on my money
Obviously you have to take into consideration that the post will promote real estate purchases as the author can stand to benefit from promoting it.
One thing to consider is what the millenials are doing. Lot of articles are saying that this large cohort is shying away from buying homes and instead choosing to rent. If this plays out it may have the biggest impact on home values (if no one buying prices will drop)
Agreed. Kinda like your grandpa’s stamp collection–things are only worth something if somebody else agrees by backing it up with a trade (e.g. your house for my cash).
When I read stuff like this, it’s hard not to think about the propaganda of the diamond industry. Realtor: Your family deserves your love by living next to a trout stream! DeBeers: The size of your love is proportional to the size of the diamond!
I’ve read that millennials aren’t buying diamonds like their parents did…
Will they drop, or will investors be the buyers instead? I guess it comes down to whether those millenials are renting SFHs or whether they’re living with their parents.
The real estate bubble bursting after the decimation of the union at the hands of the profit-maximizing corporation has made my generation lose all faith in the concept of “job stability”-as-“location stability.” We do expect to be employed but not in the same place. I’ll buy houses, especially when the interest rate on debt is 3%, but I have no presumption that I’ll live there as a “forever” house.
Honestly, I just hear a substitution of the same fallacy that “housing prices will rise forever.” Now the justification for buying investment real estate is that “rent will rise forever.”
Not to mention this concept of “tappable equity” is ludicrous. It’s only tappable if you take on debt or find a sucker to buy it from you with their cash.
For those in California, it seems there are still quite a few questions, especially while rents have not kept up with costs of an equivalent mortgage. I don’t have the hard data to back this up, but a gut instinct suggests that the other shoe will drop sometime soon with recent tax law changes (increased standard deduction essentially negating most or all of the mortgage interest deduction, loss of state and local tax deduction) and rising interest rates. Not to mention this impending trade war which stands to increase prices and costs of maintaining the usual American standard of living, potentially causing loss of jobs as American companies have to raise prices and exports drop, and importing raw materials gets more expensive.
I certainly agree with the person who approached you at the conference-we are in an escalating housing cost situation-made worse (herd mentality and reality) by the interest rate increases. Their is nothing in this article that suggests and that makes it encouraging to buy a more expensive home, but WCI made it clear this was a $5000 advertisement dressed up as an article.
The charts don’t convince me much, one way or the other, in that I generally don’t believe any recession or lack thereof can be predicted with certainty.
That said, I think it’s a mistake to “wait for the bubble to burst” instead of buying when you have both the need and the money. First of all, assuming their money is sitting in cash as they wait, that’s a big opportunity cost. And if prices continue to rise, inevitably people become impatient or succumb to FOMO and end up buying in at a higher price… often at the worst possible moment. Finally, it seems to me that if their family has outgrown their home and are truly “uncomfortable” then life is too short to worry about saving a buck by timing the real estate market.
I tend to lean your way. While it’s nice if your timing works out such that you can buy at a low, then great. But I think it’s more important to time your life right than to time the housing market.
Couldn’t agree more. While purchasing your primary residence is a huge financial decision it is not purely an investment. It’s too personal to be objective – and you can’t time the housing market –
Also I enjoyed this article and thought it accomplished it’s main point- to argue that high prices alone do not recreate the broad conditions that led to the crash in 08
Why would rising interest rates increase the cost of housing? They only increase the cost of borrowing to pay for that housing. Rising interest rates should slow the rate of price appreciation.
I’m not sure the encouragement being given is to buy a “more expensive” home, more like to go ahead and buy the house you want when you’re ready for it despite talk of a housing bubble.
And you guys with your comments about advertisements and conflicts of interest sure make it hard to raise money for a scholarship. Maybe next year I should just sell ads, keep the money, and spend it on a trip to Antarctica or donate it to a charity of my choice instead. If you don’t like reading sponsored posts, don’t read them. They’re very clearly identified in the first line.
I’m not sure you could have made it more clear that this was a sponsored post
Rising interest rates drive housing prices up because more people are trying to purchase homes while “money is cheap”. There’s even more of an impact when housing inventory is low or not meeting existing demand since it generates additional demand (arguably artificially) for the limited housing stock that’s available. Not many buyers today are aware of the double digit mortgages from the past or how inexpensive financing is vs. historical levels. Or just as likely they don’t care and rising rates are the “must have” reason for buying now.
Reason #10: Recession does equal a housing crisis!
There is a Typo in the title, as the following paragraph states that recession does NOT equal a housing crisis. I would not even bother commenting if it were not the title and I assume some people Skim the article and could be mislead by the Bold Red Title.
Thanks, we likely missed that in the editorial process.
I would love to see this post rewritten focusing on California, because there I truly believe we’re in an extremely dangerous market. I had a doc tell me the other day that if she didnt buy then she would be totally screwed and would never be able to afford a house so shes gotta buy now at any price.
What happens in April 2019 when her CPA tells her that her mortgage interest and property taxes aren’t deductible anymore? I think ppl dont think about these things until they actually happen on average, so I think California could really implode.
Other parts of the country seem reasonably priced by comparison.
Don’t get me wrong, I’m glad you have a sponsored scholarship, and yes you disclose that they are sponsored posts, but I come to WCI for original content. This is far from that. Sections of it are more than likely NOT written by Josh Mettle. I received an email with the same graphs and text content from Ross Zimmerman at Fairway Mortgage last week.
https://imgur.com/a/F64g2QH
The conflicts of interest are obvious, but that’s not my point. I expect better out of WCI and its paid advertisers than using boilerplate content as “advice.” I can get that everywhere else on the internet.
WCI has many missions. One of which is embodied in this scholarship program. Another of which is to bring you original content that will help you get a fair shake on Wall Street. Some of our activities may focus more on a part of our mission that is not the part you come here for. We can’t be all things to all people at all times, unfortunately.
Why would you be surprised that Fairway Mortgage uses its material in more than one format? I publish the transcripts of my podcast here on the blog. Do you consider that boilerplate too? I think your expectations for what you were going to get out of a clearly labeled sponsored post were set way, way too high. I would suggest you skip the other four that will run between now and October (all of which, like this one, will be clearly labeled) as you will likely be similarly disappointed.
I would expect that if I were going to use YOUR individual services, yes, that you would generate the content that gave me confidence in YOU. I do see value in the accumulation and interpretation of knowledge, but if JOSH wants my business, I’d be disappointed if he was passing insights that weren’t his as his own. Elsewhere in the world, this practice is frowned upon, even if not illegal because Fairway owns the copyright.
That being said, based on your blog, I went to Fairway for my mortgage and they weren’t competitive at all for mortgage rates so I went elsewhere anyway. The knowledge of how to shop around and what are the important parts of home buying, I have WCI to thank for – it’s not that the knowledge was original, but the way you put it together YOURSELF, made me have faith that YOUR knowledge was trustworthy. That’s all. I appreciate the advice to screen the next few out.
You know Josh IS Fairway, right? I’m sure he’s fine with HIS material being used by HIS company. It seems like suing for copyright infringement wouldn’t help anyone but the attorneys in this case!
Also, what is “tappable equity growth” and why is that somehow related to which quarter of the year it is?
I thought # 6 was interesting- that people are paying their mortgages down. Although you get a similar effect from simple appreciation fo the value.
It’s interesting to me how many commentors aren’t even attempting to engage with the material (for or against) and are instead focusing on the source. Because the author has a bias doesn’t negate the potential value of the various points he makes.
The most relevant in my opinion are the fact that wages are rising (I’ve heard the opposite from many other sources–in particular wage gap data showing an ever-increasing disparity between executive and average employee pay) and that lending standards are far better than in the mid-2000s (which is undoubtedly true).
I’m not convinced either way, but despite the author’s bias, I feel this was a relevant and interesting article.
Reminds me why Mike Piper just shut down the comment section of his blog years ago. Truly, no good deed goes unpunished.
I agree with you that a lot of the criticism here doesn’t make a lot of sense, but I don’t understand why you are as bothered by it as you are.
Look at the bright side. Lots of negative comments are probably better than no comments at all. In the former case, it almost certainly means you have more traffic.
The internet is a great place to make money but in order to do that, you have to deal with some negative stuff. Like this.
That’s not to say you shouldn’t respond. I think you absolutely should. Just try not to be bothered by the comments. I can’t be sure that you truly are, but it seems that way. But if you aren’t, then just disregard all of this.
It does tick me off. It makes me think, “Who would want to make a major contribution to a community’s scholarship fund when that community treats him like this?” I’m not quite as ticked off as I was when I saw commenters tell scholarship winners they weren’t deserving the last two years, but it’s a close second.
Plus, it’s not even like it’s a bad post. Sure, he pretty clearly takes one side of what might be an interesting debate, but people call it an advertisement. He doesn’t even mention his firm except in the tiny print compliance-mandated legalese at the end. You want to see an advertisement? You want to see someone trying to sell something? It looks like this: https://www.whitecoatinvestor.com/fire-your-financial-advisor-the-wci-online-course/
I don’t think this post even qualifies as a soft-sell by comparison, much less an advertisement. Maybe you could call it an editorial or an opinion piece, but an ad? Maybe I should just be flattered that I’ve been able to disguise my ads so well in the past that people didn’t complain about them. But even if they did, that’d be a lot easier for me to take than to see people going off on scholarship sponsors and applicants. I’d just ask them “Which part of for-profit do you not understand?” But here I am doing something that isn’t even for-profit and getting flack for it.
All right, I’m over it. Rant over. I’m going on vacation. See you all in a week.
To be fair, I have argued with some of your own posts too that contradict the central tenets of this community.
Do you think we’d ignore a post by a Ferrari dealer saying that now is the time to buy?
I get it, you run a business. Part of running a business is listening to criticism.
I agree and will leave it at that.
I don’t mind you arguing the merits of a post, whether I write it or somebody else does. It’s the comments like “I’m shocked this was posted” and “I can’t believe this is even on WCI” that don’t bother offering any sort of counter argument and primarily serve as ad hominem attacks. Attack ideas, not people.
By the way, if you know a Ferrari dealer who would like to sponsor the scholarship, please send him my way.
I wish you had a “like” button. Some of your comments are quite entertaining. :O)
I actually liked the post even if I don’t agree with the central thesis. The real estate market is less frothy than in ’07, though that doesn’t mean there won’t be another correction.
That said I understand the criticism of sponsored posts. I see the criticisms as concern for the overall editorial stance of the website, which is the sum of all posts. The other subtext of the criticism is that the WCI community is not wholly supportive of the WCI Scholarship Contest. Determining merit based scholarships is always a bit iffy. Having a merit scholarship worth tens of thousands of dollars determined by basic personal finance essays of varying quality annoys some people. Sure the essay contest aligns with the site’s mission, but doctors donating to future doctors isn’t the most popular cause.
Unless you give money to the scholarship, it really makes no difference what your opinion is regarding how and to who the scholarship money is distributed. The rules and requirements for the applicants is stated clearly on this website. The scholarship is based on an essay as are many scholarships. I would like to think that the some of the applicants who receive the money are NOT at the top of their class but at least have some sort of financial plan for their life because of this website.
The comment about this post not contributing to the overall editorial stance in a positive way is inaccurate. All posts aren’t everything to everyone all time as WCI puts it. We are all at different stages of our financial journey and this was an enlightening post for me in understanding current national housing and mortgage stats.
Given that we’re running something like 265 posts this year, and only 5 of them are sponsored, I don’t find your first point particularly concerning.
Your second point, however, is intriguing. While it’s probably a very tiny subset of the community that isn’t supportive (I mean 70 people have already volunteered to help judge), it really comes down to my staff. They really think this is a great thing we’re doing and love seeing the top essays. I’d consider doing it as a fundraiser for a more traditional charity – childrens’ cancer research or something, that would also align with the mission. But I’d still use sponsored posts to help fund it. Then I’d REALLY give the complainers a hard time. “Couldn’t read a sponsored post to help a poor little kid. You must hate little skinny bald kids stuck in the pediatric hospital for weeks eh?”
At any rate, it’s not like this scholarship has an endowment fund or anything. We can stop doing it at any time. If readers really hate it, we’ve got plenty of other things to do.
LOLOL! Maybe he’d give the winners a month’s lease?
great article, Josh! I look forward to working with you when i’m ready to pull the trigger on our physician loan.
Thanks! Appreciate the kind words and I look forward to helping you.
Hopefully we’re all critical thinkers and research each and every major financial decision. I thought the post was a well written with full disclosure upfront.
I just added a small townhouse to my real estate portfolio. It was a divorce special and neither seller could refuse an all cash offer to pay for their divorce lawyers. I saved over $20,000 by researching and waiting. It was on the market for 1 day ???
Hmmm, reads like a whole bunch of crystal balling to me. Easy to find the same article circa early 2008.
Just skip to Reason #11. If you need a home, go buy one. You get to live somewhere nice, build some equity and it will probably be worth more sometime in the future. Any expectations beyond that are just speculation.
One big thing overlooked is unless you are doing location arbitrage, most people sell the home they are in at the market price and move to a bigger home in the same are. So if you wait to buy, the price you can sell at goes down as well.
The author gave some very reasonable percentages to consider and reminded people multiple times to not be a slave to your home. If you can afford to move up, and it makes sense do it. We use to kick ourselves because we didn’t buy the “big” home when they were cheaper, but if we had at that point, we probably would have gone bankrupt. We bought when the timing was right for us.
Thank you WCI and the sponsors that are willing to be a part of the scholarship. How many other sites out there do this sort of thing?
cd :O)
Great article, and food for thought. Excellent timing, and nice to see perspective that is not doom-and-gloom. Had we listened to all the market skeptics, we would have gone to cash five years ago. Our experience…buy what you can afford and hopefully enjoy, and market fluctuations will not matter.
willthrill81 linked to this post on Bogleheads, and asked people to comment only on the merits of the argument, not who was making the argument. If you’ve made it this far down the comments, the BH discussion is worth a read:
https://www.bogleheads.org/forum/viewtopic.php?p=4010610#p4010610
BH comments were a good read (although similar to this forum after filtering out the author bashing stuff).
My favorite comment from BH:
“I haven’t been seeing Carleton Sheets on late night TV, so I’m not too concerned.”
I’ve been thinking it’s a growing bubble in Boulder/Denver metro the past 2+ years precisely because of the radios ads that are running again. Than Merrill is running around pitching house flipping workshops again, another guy is pitching tax lien workshops, another guy is pitching real estate investment workshops and Renters Warehouse is trying to convince every home seller with a pulse that they’re idiots for not renting out their property instead of selling it.
Except for the last one, those are all identical to the radio ads I was hearing in 2007 – 2008 around here (including some of the same people). If skyrocketing ARMs and liar loans reappear (and today’s lending standards and down payment requirements aren’t remotely on par with the author’s claims), it’s deja vu all over again for real estate.
I live in the metro Denver area and it’s hard to believe we’re NOT in a bubble, with houses near us increasing in value by 10-12% per year. It’s just not sustainable. Something has to give, but no idea if they’ll just plateau or actually dip. We’re waiting to see what happens and hope we don’t regret that. It doesn’t help that people move here from California and and can plunk down hundreds of thousands in cash.
Yes, but does it plateau or dip this year or in 5 years? Big difference in what you should do.
Wife and I were perusing houses in our neighborhood in southwest GA where housing prices are as stagnant as an old pond. We were planning way out into the future talking about schools for kids who haven’t been born yet in a city where we may or may not even stay long. Our current home (paid for!) is near a charming and well-performing elementary school, ostensibly the first public school our first child would attend. After much back and forth we decided not to move. We didn’t decide based on an extrinsic condition – housing prices, neighborhood, bubble, etc – but instead based on our investing policy statement (https://www.whitecoatinvestor.com/how-to-write-an-investing-personal-statement/). In our section regarding how our wealth was allocated, we have explicit instructions on where we want our money to go and a more expensive house just didn’t fit into it. Perhaps the best way to judge whether you should upgrade your house is based on your goals and a well-thought out IPS not made in the heat of the moment.
My thoughts exactly. It’s more about timing your life than timing the market.
There are deals in every market – Just Sayin’
Good information. I’d like to more on the real estate investment market a capital markets.
Enjoyable article and great cause! We lived in a cheaper home 10-15 minutes from my residency but attending job is now about 30 minutes away. We are moving into town after 3 years of residency then 3 more of living like a resident. My wife even read along with this article and she enjoyed it as well…. probably because ive been second guessing our choice! Choosing lifestyle inflation over FIRE ?
Gawd, all that work and it isn’t even half factual… renting is at an all time high since 1965 . Shiite analysis
https://www.statista.com/statistics/184902/homeownership-rate-in-the-us-since-2003/
Really ECH??? Follow this link and scroll to the bottom of the table. Last time I checked 64% was greater than 63%, thus homeownership percentage is moving higher and MOST areas of the country are still seeing appreciation. No shiite!
https://www.census.gov/housing/hvs/data/histtab19.xlsx