Where’s the single family home market going?

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Hadn’t really considered this question in a while, until a client asked me yesterday.

Let me start out by saying that anyone who is 100% certain of the direction of any market ought to be at a hedge fund betting on their ideas. In the case of the residential housing market, I think you could probably buy some kind of future contract on the Case Schiller Index. Or, you could just go buy a house or two!

The reason my client asked the question is that he is wondering what will happen to housisng prices when interest rates inevitably start to climb. The theory is that, as rates climb, monthly payments climb. So, someone who can handle, say, a $400k mortgage now ($1850 / month payment 3.75%), would only be able to handle a $355k mortgage if rates were 4.75%. Valid concern, right?

Yes.

But there is potentially a counter-vailing force, which is a gradual loosening of underwriting standards. As a result of the mortgage mayhem of 2005-7, bank got burned. They mostly stopped lending in 2008-10 and have opened up only slightly since. Sure, you can get a mortgage if you have very good credit, a stable job, and plenty of cash in the bank. But more marginal borrowers still find it extremely difficult.

If, as many people expect, banks continue to loosen underwriting standards, you might see a bunch of marginal borrowers coming into the single family market, even if interest rates go up. This might have the effect of continuing to push prices up, even with higher rates.

All things being equal, I think it’s a reasonable time to buy a single family home (assuming you don’t do a stupid deal).

Standard Kagan’s Blog warning abouts single family homes: Don’t view buying one as an investment decision!! Single family homes are not assets, because they don’t cashflow. They are liabilities that you take on because you want to consume a certain type of housing. Either buy them all-cash or wait until you have enough passive income that, if you lose your job, you can still make the mortgage payments.

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