Terry Savage: Your home investment

For the vast majority of Americans, their home is their greatest lifetime investment. But as in all investing, timing is everything. The real advantage of putting money into home ownership is that you’re incented to ride this investment out through ups and downs, because not only is it an investment — it’s also the roof over your head!

Home prices make headlines when they reach extremes. In the mortgage crisis of 2008-2011, housing prices fell sharply. Many homeowners looked at the decline and decided it wasn’t worth paying the mortgage when the home was now “under water” — worth less than the amount they owed on the mortgage. It was impossible to convince them that by walking away they were not only ruining their credit but also missing out on a future rebound.

By 2021, potential homebuyers were once again engaged in bidding wars and frantic efforts to snag a home from the competition. Prices soared, setting records, fueled by low mortgage rates. Just two years ago, 30-year mortgages rates were only around 3%.

Housing is a market just like stocks. Since we see stock prices reported every day, we are more aware of the swings. And it’s easy to liquidate a stock position at a very low cost. But home prices move in longer waves, though they are also impacted by the economy and interest rates.

Home prices hold up

Are we about to see another housing price downturn? Despite a doubling of mortgage interest rates in the past year, home prices have remained fairly stable. In fact, the Case-Schiller home price index recently ticked up.

The popular explanation is a lack of supply. Anyone with a 3% mortgage isn’t going to sell and then finance a new home at the current 7% rate for a 30-year fixed mortgage. But builders are responding to demand, setting a 13-month high for new housing starts in May 2023.

Some of the froth is already out of the housing market. The home affordability index is near record lows. And with fewer people able to afford a new home purchase, rental prices remain stubbornly high. Ironically, higher overall housing costs are a key factor keeping the Fed active in raising rates to fight inflation. They may go too far in their rate hikes, causing a housing collapse.

The stock market doesn’t seem worried about a housing crash. InvesTech Research’s Jim Stack created a proprietary “Bellwether Bubble Housing Barometer” years ago. It consists of stocks whose revenue is primarily derived from the housing and construction sector.

That index peaked in 2005 — shortly before the housing bubble burst — and subsequently collapsed. Today’s Stack’s housing index is twice as high as in 2005, causing him to worry about future housing prices.

Buy or sell?

It’s important to put prices in perspective when considering a home purchase. Affordability depends on prices, as well as on carrying costs (mortgage rates). But there are ways around those barriers.

Almost every state has a first-time buyer’s assistance program, many of which apply to borrowers who have not owned a home in three years. Check your state housing department, or search for them at Zillow or Rocket Mortgage.

These programs may come in the form of down payment assistance or outright grants that do not have to be repaid. If you’re a veteran, check with the VA for rates as low as 5.8% for 30 years with no down payment, depending on the lender.

Historically, home ownership has been a significant path to generational wealth in America. Home ownership can create anxiety. But it’s no different feeling insecure about making the monthly mortgage payment than it is paying the rent in tough times. And in the end, you have something to show for your monthly payments if you own your home.

Yes, a recession could drive prices down in your neighborhood, just like stock prices could collapse in a bear market.

But there’s one big difference between stocks and houses. If you pay “too high” a price for your house, you can live in it and ride out the cycle. And if you take on a mortgage rate that is “too high” you can always refinance in the future. And that’s The Savage Truth.

(Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.)

©2023 Terry Savage. Distributed by Tribune Content Agency, LLC.