Is there ever a bad time to buy a home? Buying a home is one of the biggest financial commitments you are likely to make in your lifetime, and you want to dodge the most common pitfalls.
Home prices have a tendency to follow seasonal patterns; if these persist in the future, you can use them to your advantage to avoid overpaying.
In 2019 (the most recent full year not impacted by the pandemic), US single-family existing home inventory peaked in June (1.70mm homes), as did prices ($289k median home price). This implies if you want the highest number of options, June is the best month.
However, that was also the peak month for home prices in 2019, and prices fell for four straight months after that, bottoming in October 2019 at $274k. They did not permanently surpass that peak for an entire year, reaching $298k in June 2020.
One way to manage risk in buying a home is to minimize the number of months that you are underwater on your purchase; in other words, count the number of months after your purchase during which home sale prices were lower than the month you bought your home.
By this metric, June 2019 was the worst, as there were 11 subsequent months when home prices were virtually flat or lower. The best months were a tie between October 2019, November 2019, and December 2019, when home prices ranged from $274k - $277k; there were only two further months, January 2020 and February 2020, in which home prices kept falling; by March 2020, they were at $283k, above late 2019 levels, and they never looked back.
This likely results from the rush of buyers that are most comfortable moving around the end of the school year and before the next school year starts. They are willing to overpay for the convenience of moving when it is least disruptive to their family’s lives. While you may share this desire to maximize the convenience factor, you should carefully consider joining in this buying frenzy if you want to make the best possible financial decision.
If you had waited until October 2019 to buy instead of June 2019, you would have seen a 5.1% drop in home prices that could have saved you a lot of money on your purchase, and inventory levels of 1.56mm might still have been high enough to yield attractive choices, beating out the inventory levels from the beginning of the year (Jan 2019 – March 2019, all <1.5mm), and November 2019 until today (inventory dropped to 1.45mm in November 2019, and has remained <1.5mm since then, falling even further to <1.1mm in November 2020 all the way through the latest month June 2021!).
The pandemic has continued to upend the seasonal trends that typically prevail in the single family housing market.
Rather than peaking in June 2020, as would be expected under typical seasonality, home prices continued soaring into the fall, as low mortgage rates, work from home trends, and lifting of COVID restrictions created a persistent sellers market. It remains to be seen if seasonality will return in 2021; home prices reached a record $371k in June 2021, and record low inventories and low mortgage rates could prevent home prices from correcting between now and year-end; it will likely take a combination of higher mortgage rates, a slowdown in employment growth, and firm direction on returning to offices, to disrupt the strong upward momentum.
Seasonal factors can lead to overheated conditions that can keep your home purchase underwater for months, or up to a year; a market crash can keep your underwater even 5 years later; for instance, Pittsburgh was a relatively subdued market heading into the great financial crisis, but the local home price index was still down 3.3% from the second quarter of 2006 to the 2nd quarter of 2011. Monitoring imbalances in the system is the best way to know if there is a high risk of a housing crash. When the imbalances that are contributing to higher home prices normalize, that has historically resulted in home prices reverting to a lower level without support from the abnormal factors.
1. Unusual, new, or fraudulent mortgage products.
2. Abnormally low interest rates and mortgage rates.
3. Temporary influx of foreign demand.
4. A hidden or misunderstood buildup of excess home inventory.
5. A frothy labor market that is over-inflating incomes.
Of the above factors, we can certainly check the box on low mortgage rates; and we can safely rule out new mortgage products and a frothy labor market as factors. Direct demand from non-US buyers is not at unusually high or volatile levels; however, the rise of ibuyers or institutional home buyers, some of whom buy homes for a quick flip, and others that intend to be long term holders of rental properties, creates a new dynamic that needs to be monitored; it is “foreign” in the sense that it is distinct from the owner occupied category; and it may be creating a buildup of inventory that is not well understood yet, because these owners have shorter-term financing (i.e., not the traditional 30-year mortgage used by most owner-occupiers) that could potentially lead to forced sales in a prolonged economic downturn. Although these models performed adequately during the pandemic, they were helped by massive amounts of government stimulus that might not be available in the next recession.
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