The Challenge of Our Current Housing Market

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If you’ve considered buying a home in the past year, you’ve undoubtedly discovered that the housing market is in a less-than-ideal state, to put it mildly. Prices are up, interest rates are high, and many families are being priced out of the market for homes they might have easily purchased just a few years ago.

What happened? And, more importantly, what guidance can we offer for people in the difficult position of planning their finances over the coming months?

Home Affordability is Getting Worse

Between 2009 to 2021, homebuyers enjoyed low interest rates even as home prices crept upward. With the Fed’s interest rate hike, that scenario has changed – with dramatic results.

A home that cost $300,000 in 2020 might now be on the market for $400,000 or more, and mortgage rates have more than doubled in the past three years. Monthly mortgage payments have doubled, but median income has only risen by about 10%, creating a significant gap in affordability.

Interest rates are one explanation for the housing situation, but they’re not the only factor. At other times throughout history, rising interest rates have been coupled with an increased supply of housing that led to an overall cooling of prices.

That’s what we saw after the 2008 crisis: foreclosures and new construction created enough inventory to drive prices down. We’re not seeing that happening yet.

The housing inventory in Albuquerque, like the rest of the nation, has been in steady decline, with more young people coming into home ownership, more investment properties being converted to rentals, and fewer Baby Boomers willing to give up their homes without another to move into.

This means, according to numbers from FRED (Federal Reserve Economic Data), that real estate inventory is half of what we’d consider normal, and Albuquerque’s inventory is a quarter of 2016 levels. With low supply, growing demand, and interest rates pricing people out of loans, it’s no wonder prices are staying high.

Don’t Sacrifice Your Financial Security…

At John Moore Associates, one of the pillars of our financial philosophy is that investments should be built around your long-term financial goals. This goes double for home ownership, which has a far greater impact on your family’s day-to-day life than any stock portfolio.

Buying a home is a long-term commitment. It takes 5 to 7 years for a home’s value to rise enough to offset the transaction costs of selling it. During that time, you’ll be living in it as a primary residence. You’ll need to handle its maintenance and upkeep costs and spend many of your waking hours inside. You’ll also be responsible for many expenses renters don’t face, from repairs to insurance and property taxes.

It’s always worth waiting for the right opportunity to buy a home you’ll be happy with rather than settling for something you don’t like or buying something you cannot truly afford.

…But Don’t Give Up Hope, Either

Generally speaking, a home’s purchase price should be equal to no more than three years of your household income. Your total debt payments should make up less than 45% of your gross monthly income. When your debt-to-income ratio skews higher, you risk not being able to maintain giving and savings goals. And, unfortunately, the current market means that many would-be homeowners are unable to buy their first homes right now.

However, “right now” doesn’t mean “ever.”

Construction companies are working at record speeds to build new homes to increase the real estate inventory. Developers and city planners are working to find more room for housing in more crowded urban areas. And as efforts to combat inflation and raise wages across the country continue, we should begin to see some relief.

It’s hard to predict what the immediate future of real estate and the economy might be. But it’s safe to say the situation will not be dire forever. And in the meantime, you have a chance to review your personal finances and begin making some changes that will put you in a better position.

Instead of locking into an expensive mortgage, it may be worth renewing your rental agreement and taking the year to pay down credit card debt, vehicle payments, and student loans. You could also look for ways to boost your income and trim expenses while watching the housing market for the right opportunity.

A financial advisor, like our team at JMA, can help you with understanding your current finances, saving money, and creating a plan to put you in the best position to buy when the real estate market improves.

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