Inflation!

From the NYT: “Interest rates are rising. You want a house. What will happen next?”

Well, surprise of all surprises, my very first media mention ever is in one of the newspapers I subscribe to and have read somewhat religiously for over a decade: The New York Times! And, by one of my favorite authors, Ron Lieber. Ron wrote The Opposite of Spoiled, which I recommend to all clients with children.

What is happening with inflation?

Well, the pandemic, obviously.

The good news is that it’s likely not a permanent or even long-term situation. We may be nearing the phase where Covid-19 is becoming endemic, which hopefully means that we will see more global vaccinations (+ little kids, we’re still waiting on those shots!) and eventually a return to normalized labor markets and supply chains.

From my view as a parent of three kids under 5, it seems to me that after our kids have the ability to get vaccinated and parents feel like childcare and schools are back to normal, then we’ll begin to see things stabilize.

What does this have to with housing inflation?

Well, one of the many factors driving housing costs in popular cities like Austin is the plentiful number of high-paying jobs. Workers of all skill levels have more negotiating power, and therefore more money in their pockets to save and invest in a home.

Millennials like me are also part of a giant generation of people getting married, having kids, and wanting more space.

Many of us grew up with relative affluence – and by that I mean, with our own bedrooms, possibly our own bathrooms, and many other comforts that previous generations didn’t have. The great wealth transfer from Baby Boomers to Millennials has also begun, and thanks to Pinterest, we are often drawn to aesthetically pleasing living spaces (aka “move-in ready”).

All this is to say that Americans as a whole have greatly “inflated” our standards of living over the past several several decades.

Our homes have, on average, about double the square footage per person now than we had in the 1970s. When was the last time you saw a house built with only one bathroom?

This is not necessarily bad, though it certainly does have implications for land development code and the housing supply. When supply of any economic good is low and demand is high, prices usually rise. 

And that is why “It’s a terrible time to be a buyer.”

Of course, many of the people reading this are Realtors® and can tick off story after story of buyer clients losing a bidding war, compromising on an appraisal waiver, giving the seller a looooong leaseback, or having to make an offer sight-unseen.

Even though it may feel terrible in the moment, the closed price of a house should (and in my view, still currently does) closely mirror a “fair price”.

What’s a “fair price”?

When a buyer and seller are both aware of all material facts, a “fair price” is one at which a they are willing to freely transact. This applies to public market prices for anything – stocks, bonds, MLS-listed homes, etc. The current price generally reflects the aggregate market expectations for future cash flows and asset growth at the moment of sale.

This means that while the home price might feel terrible, since there isn’t a housing bubble (in my opinion), the price itself is likely fair. The key is to just buy a house that you (or your client) can comfortably afford. 

Final thoughts:

1. People like me have virtually never experienced long-term “normal” interest rates as adults, so we’re naturally averse to hearing that rates are going up. Fundamental economic theory states that as rates rise, prices usually stabilize or go down. Read Ron’s take-aways regarding the difference between a 4% and 6% interest rate on a 30-year mortgage. It’s probably a few hundred $/month.

2. When buying any property, don’t over-leverage yourself. Our goal as a financial planner is for your income and assets to support the life you truly want to live – aka financial freedom! We certainly can and often do use real estate to grow your wealth, but we want to do so methodically with your goals, risk tolerance and temperament in mind. Many people can be just as happy – or even happier – with a smaller home that allows them more flexibility with their income and time.

3. Remember that part of the inflation in housing is being driven by our own preferences for location, design, and space. If you’re looking to save money, you may need to compromise on one or more of those elements.

4. Of course, if you know any empty nesters or single people in big single family homes, tell them it’s time to downsize and let a millennial family take over! This may sound a bit controversial, but without massive changes to land development codes, downsizing might be one of the only ways to help bring supply and demand closer together.

5. Last, but certainly not least: if you aren’t a Realtor® yourself, get an experienced one! Most of my clients are top-producing Realtors® that are truly awesome people, fun to be around, and great at their jobs. Don’t try to navigate either the buy or sell side of this market on your own!

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