A few days ago a friend sent me an article titled Americans Haven’t Been This Down on the Housing Market Since 1982.
The crux was “how fast home price appreciation has rattled prospective buyers,” pointing out that a recent survey found only 29% of people think now is a good time to buy a home, down from 58% a few months ago.
My friend asked, “Your thoughts?”
My initial thought was I sure hope articles like this don’t scare people away from buying a home. That would be a mistake.
The home you don’t buy today is the home you’ll wish you owned tomorrow. Why?
1. Builders can’t keep up with current population growth. We’ve made babies faster than builders have built homes, and these babies are growing up to become homebuyers. This increasing demand will continue to put upward pressure on home prices.
CNBC published an article last week saying “The U.S. is short 5.24 million homes, an increase of 1.4 million from the 2019 gap of 3.84 million. Single-family home construction has suffered from a severe labor shortage that began well before the pandemic but was then exacerbated by it.”
2. On average, home values will rise over time because a house is a storehouse of current commodity and labor prices and those will rise over time. That’s what my friend said when he sent me the article. His observation was simple and savvy.
Commodities prices (materials like lumber and steel) have historically risen over time. The same is true of labor costs. It’s a simple equation:
Increased labor cost + increased materials cost = increased home prices.
A Forbes article recently observed, “Construction is up against the same problems it’s faced in years past: increased lumber prices, limited lot supplies, supply-chain issues, restrictive zoning laws, costly permits and a skilled labor deficit.”
***
In a nutshell:
**We have a shortage of homes and will continue to, which will drive up housing prices.
**Material and labor costs will continue to rise, which will also drive up housing prices.
If you’re not convinced, recall the article I wrote a few months ago entitled Rental Nation. I pointed out that nationally about one in four homes is sold to an institutional investor for rental (one of three in Phoenix).
Big time “smart money” now sees homes as a better investment than stock. Investors believe future rental income will exceed stock dividends and future home appreciation will exceed stock price increases.
While today’s homebuyers may suffer from “sticker shock” as a result of recent home price appreciation, this is not a reason to avoid buying. Barring a “black swan” event (which would temporarily affect the price of every class of investment) all indicators point to home values climbing briskly for years.
I think home prices will double in the next 10 years. A $400,000 home today will sell for $800,000 in 120 months. Since appreciation compounds, a doubling of home values by 2031 only requires a 7.2% annual home appreciation rate. That’s highly likely to happen.
Living in PV, you probably own one or more homes. But you may have kids or grandkids contemplating whether to rent or buy. Tell them not to fall for alarmist articles warning that we might be in a housing bubble and it’s not a good time to buy. Negative headlines are sometimes used to drive readership. In this case they will drive mistakes, resulting in renters who look back in regret.
Do you know somebody on the fence about buying a home? Tell them from me:
You’ll regret renting the home you should’ve bought.
