Should I buy a home NOW or wait until 2009? (OK, that’s a joke, 2009 is like so last decade)
As anyone with a landlord will tell you, buying a home is a soundtrack always playing in the back of your mind. (When your rent goes up it starts to become the song you can’t get out of your head!)
When most people process this decision, they do so with the same two basic things in mind: 1) where are interest rates and 2) how are prices. Rate and price, price and rate. Now, while those are excellent short-term qualifiers, there exists a more complete number that speaks better to the medium- and long-term decision. And most people miss it completely.
A few years back, one of my friends in the industry, Barry Habib of MBS Highway (the top economist in mortgage banking by the way) told a story of how he knew the 2008 housing crisis was coming as early as 2004/2005. Barry tells it this way:
” I was having dinner in New York with some friends and the waiter overheard my conversation and told me that he too was in the mortgage industry. Yikes, I knew right away that if a waiter was doubling in the mortgage field then the market had no room left to grow. How many more buyers can we add if we need waiters to meet the market demand?”
What this teaches us is to look and see how full the market is before we buy. How many people own homes and are we at full capacity? We learn this by looking at an important and often overlooked statistic: Homeownership Rate.
The real estate market plays nice when the homeownership rate is under 68%. When we get beyond that number, what we’ve done is basically turned a bunch of good renters into lousy homeowners. Ouch.
Look, you can always change the interest rate (refinance if rates come down) but you can’t change the price you paid – ever. So how do you know the price is a good one? A sensible one? You look at the waist-line of the market’s pants. Under 68%, it has room to grow. Over 68% and “you ain’t fitting into that” and the market goes on a diet. Prices must come down. Count on it.
As an economy, we can’t consistently sustain 69%/70% homeownership rates. Once we get near that level we run out of buyers. And when that happens the market reacts by lowering prices. And lowering prices again. You don’t want to be on that side of the curve.
Today we are near the end of 2018 and the Homeowner Rate is 64.3%. (By comparison it was just under 70% in 2004.) So, we’re still well below the danger zone and therefore still safely in the BUY zone. Let that guide your decision, not interest rates.