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Housing market guidance

Posted at 2:13 PM, Sep 12, 2023

Future of the housing market

Many young adults have told me they're afraid they will probably rent their entire lives because they don’t think they will ever be able to afford a home.

That doesn't sound like a sustainable housing market to me, so I reached out to University of Texas at Austin Real Estate Professor Greg Hallman.

He says it's not sustainable.

The issue is that the number of houses being built went way down after the crash in 2008. He says all those tradespeople drifted into other jobs, and so the industry still barely produces.

Hallman says the long-term solution is building many more houses that are smaller and more affordable.

“They're trying to take some costs out because they're running into a problem that the cost of houses has gotten too high that even people with two jobs, decent jobs, and you make like $150,000 between the two of you, you think we should be able to buy a house, and you go out there and you look, and you’re like ‘we can’t afford anything,’" Hallman said. "That's a terrible housing market.”

Until those homes are built, Hallman suggests that prospective first-time buyers take care of their credit score, which means paying off your credit card every month.

Also, it could be helpful to reach out to a mortgage banker to find out what you qualify for if interest rates go down by a few percentage points. If interest rates lower, many more homes will go on the market, and that’s when you’ll want to buy.

Impact of high mortgage rates

I work in the library of a home that I bought when mortgage interest rates were at a historic low.

Now I have a baby on the way, and would ideally like to move into a house with more rooms. However, given interest rates are the highest they’ve been since the year 2000, I'm thinking I’ll stay where I’m at for a little longer.

This situation isn’t unique to me. It’s something homeowners across the country are facing.

Hallman says the industry calls it golden handcuffs.

“If you're a person who owns a house and you have a 3% mortgage and you find another house you like and you think, 'okay, I'm going to sell my house and I'm going to get into that other house,'" Hallman said. "Even if your mortgage amount is the same, you could be leaving a 3% mortgage and then you'd have to get a new 7% mortgage in your monthly payment for the same house.”

So let’s break that math down.

If mortgage rates were 3%, which is what they were a few years ago, your payment on a $400,000 mortgage would be about $1,700 dollars. Now, at the 7% rate, the same $400,000 mortgage will cost you about $2,700. So it's gone up $1,000 a month for exactly the same amount of borrowing which really reduces a buyers' purchasing power.

It’s hard to know if rates will keep raising, or when they’ll go back down if they go back down, but Hallman says he wasn’t expecting them to get this high.

Why interest rates rise

The Federal Reserve meets again in mid September to decide whether or not interest rates will rise again.

Instead of spending a lot of money right now, economy experts say you should focus on saving money, paying personal loans, and paying off your credit card.

That’s what the Fed wants you to do. Otherwise, interest rates will likely keep rising.

Hallman says inflation happens when people are buying too much stuff, and there’s not enough stuff to buy, so prices go up.

That’s been a constant trend since the pandemic. So the Fed is trying to calm down the buying by making borrowing money more expensive.

Hallman says people wanting to buy a house or a car are the most impacted by these high interest rates.

“Because the economy keeps doing well, the Federal Reserve chairman, Jerome Powell, says, ‘I think I'm gonna keep these rates up a long time,’" Hallman said. "You know, we could be stuck with these 7% mortgage rates for, it wouldn't surprise me if we got stuck with it for a year or two.”

Once people buy fewer things and businesses invest less, Hallman says it’s likely inflation will lower again, and so will interest rates.

However, it's not as simple as it seems. Beyond consumer demand, there are many other causes for inflation. The Cleveland Fed's Center for Inflation Research has a good breakdown on this.
What to know about refinancing

Experts say these high interest rates have slowed down the market, but if you are absolutely determined to get a home right now, Hallman says refinancing in the future could be an option for you.

"Look, they wouldn't give you the fixed rate loan at seven if you didn't qualify, you know?" Hallman said. "And so they're saying, 'look, with the money you make now, you qualify.' I don't think you could count on it, but if you Google FRED, it takes you to all these great charts with mortgage rates and housing and all the rest of that. You look at these rates and you think, does this look like an abnormally high rate or not? You look at the chart all the way back 25 years, you don't see these rates this high except for 25 years ago in 2000. And so you might think, you know, if they just came down a little bit, you might be able to refinance."

Hallman says it can't get worse for you later because if mortgage rates go up, you're at a fixed rate. On the other hand, it can get better for you later since you can refinance if interest rates come back down.

When he bought a house in the Bay area back in the late 90s, Hallman says there was a time he was refinancing every few weeks because interest rates kept lowering.

So you could buy a house now with a plan to refinance in the future. However, if you think your job or income could fluctuate, you may not want to risk it, because there's no telling if and when interest rates will lower again.