There is no question that the greater Boston area has been experiencing a white-hot real estate market. And you will find the hot real estate market will carry through to other parts of the country.
As a want to be Massachusetts first-time home buyer who has been saving your hard-earned money for a down payment, you have heard the experts who are bearish on the real estate market and experts who are bullish.
Who is right? The bears or the bulls?
Most economists remain bullish on the 2022 real estate market. The feeling is houses will appreciate at a better than average rate, but we will not see the appreciation we saw from 2020 to 2021.
The truth is no one can predict any financial market with a 100% certainty. Let's take a look at what has been driving the current market and what might drive the market in 2022 in the greater Boston area north of the city.
Should I Wait A Year To Buy A House?
Whether you should buy a house now or wait is a personal decision. And, it should not be a decision that is made strictly based on whether the market will crash or not.
Many remember the real estate market crash of 2006-2007 (or the start of). But, conditions are markedly different from where they were back then, and we will cover some of those points.
Here are a few thoughts about waiting to buy a house than buying a home now. Waiting could just cost you more than you think.
The Time To Buy Is The Time To Buy
For many, buying a home is triggered by many events. It could be a growing family, a marriage, a job transfer and a raise.
Or, you could be sick of being at your landlord's mercy. You get notice to leave, because they want their niece to live there, they raise the rents, every chance they get, etc.....
There quite possibly be other factors driving you to want to buy a home and should not be strictly driven by trying to time the most opportune time to buy in the real estate market.
You Have To Live Somewhere
For many want to be homeowners, you may not have the luxury of living in mom and dads basement apartment rent-free forever. You are making rent payments and have you noticed home many rentals have gone up in price?
Since 2007, the median rental price in Essex County has gone from $1250 to $2100 a month.
Why pay your landlords mortgage when you can pay your own. $2100 a month can certainly get you into a modest home in Essex County.
Rental Prices Are Matching House Prices
Rental prices are rising at the same frenetic price that houses are. The underlying fact is the United States is 4.8 to 6 million housing units short to house the current population.
While the housing shortage is driving rental and home prices, the housing shortage started decades before Covid-19. The US has not kept up with demand going back to World War II.
In most cases, house prices and rental prices rise and fall together based on various economic impacts.
Often, from a financial standpoint, owning a home is often cheaper than renting a home when compared over a 5-10 year period.
Money Is Cheap
Interest rates are unprecedentedly low. If you average the first 11 months in 2021 the average interest rate was slightly below 3%. In contrast to 2007, when the market was clearly in distress, the average interest rate from FNMA was approx 6.3%
Let's look at the median house price in Essex County today at $550,000 vs the same day in 2007 which was $335,000. It seems like a huge difference.
But a $350,000 house in 2007, taking into account a 5% down payment, would have a monthly payment of $2058 at a 6.3% interest rate. Compared to the median house price of $550,000 today which would have a principal and interest payment of $2202.
If current interest rates were at the same as 2007 that $550k house would have a monthly principal and interest payment of $3234.
Interest rates do affect house prices. Housing prices will fluctuate with the rise and fall of interest rates. The reason why houses have appreciated so much is that the interest rates are so low.
Supply and Demand
We touched upon a housing shortage previously. But, I want to reiterate that we have a shortage of homes and there are more buyers than there are homes for sale. They are getting snatched up the minute they hit the market.
This is an eye-opener.
On December 13th 2007, there were 4908 single family homes and condominiums on the market in Essex County.
Today, December 13, 2021 there are only 409 single family homes and condominiums on the market.
Even compared to a good market, today's inventory is drastically low. Demand is far outpacing supply. Looking back to the same day in 2003 where the market was still healthy, there were still 2723 units on the market.
Quite a difference from 2007 but still an eye-opener compared to today. Supply and demand play a huge role in how the market will play out.
Cost of Construction and Zoning
The greater Boston area is built up. There is not a lot of land available. Compound that with supply chain problems driving up the cost of materials and the prohibitive zoning in the area, the cost to replace a home or build a new one is high.
There is a correlation between resale prices and the cost of new construction. As the cost of a new build goes up, you will also see the cost of resale homes follow suit.
Market Predictions For The Next Few Years
What are the long term factors that we are predicting into the foreseeable future. If we look at the long term factors driving the cost of housing, we are not going to see any drastic changes in the next few years.
- Low interest rates.
- Low Inventory.
- Buyer demand is out pacing supply.
- High cost of renting.
- Prohibitive zoning.
Of course, interest rates could rise quickly which could stall the market. But the government is well aware they must temper any interest rate rises to keep the economy created around housing going. Also, world events can impact the market as well.
But, look at COVID-19. The real estate market only strengthened when many thought it would crash.
But beyond interest rates, it will take years for the housing inventory to catch up with demand. The only way that will happen is if new units are built. And, that cannot happen overnight.
The housing market will remain strong through 2022 and beyond. But it will most likely normalize to a year-to-year appreciation that is more in line with inflation.
The Danger Zone
The danger zone for people who want to buy a house is finding the excuse that prevents you from buying. Right now it is the house prices are too high... but are they?
So I was an agent in the last rise and fall of the market. In the early 2000s people kept predicting the market would crash and stayed out of the market.
Then the market started turning in 2006 and that prevented the same people from buying, not knowing when the market was going to bottom.
From 2007 to 2009 the market declined quickly. It wasn't until 2013 that it was clear the market had turned around and prices were matching peak levels of 2007.
If you were bear on the real estate market in 2003 and 2005 and didn't buy, you still missed out on some appreciation in the housing market by 2013.
Meanwhile, you sat on the sidelines paying your landlords mortgage and not building equity for yourself by paying down your mortgage and gaining some market appreciation.
Buy For The Long Haul
Here are some things to consider, especially when buying your first home.
Buy for the immediate to long term. Historically, homes mirror inflation over the long haul. There is a correlation between inflation and home prices.
The real estate market over a long period is always rising. But as it rises, it has its peaks and valleys. But over the long term, your home will appreciate.
Of course, we would all love to buy a home at the bottom of a housing down turn. And, you wouldn't necessarily want to buy at the peak. But the reality is that it is impossible to predict either.
There are many other factors that go into buying a home besides the actual price of the house.
There are certainly financial concerns when buying a home. But, buying a home isn't strictly about the cost of a house. There are many other factors to consider.
If you buy a home and you think in terms of 7-10+ years, you will weather most downturns. It is never a great idea to buy a home for she short term, and it can certainly lead to trouble.
Sitting on the sidelines for 2022 is a mistake that could cost you thousands.
Other Real Estate Resources:
- A seller's market certainly presents challenges for buyers putting making an offer on a home. Michelle Gibson discusses using an escalation clause to help become the winning bidder on your dream home.
- Nothing can be more important than the funds you hold in an escrow account as a good faith deposit. Bill Gassett takes the time to explain what escrow funds are in a real estate transaction?
What Will It Cost You To Wait A Year To Buy A House? is provided by Kevin Vitali of EXIT Realty.
Are you looking to buy a home? Partner with Kevin Vitali to help you buy your dream home. 978-360-0422