Last week, the markets were up, setting a new market high on Thursday before retreating slightly. Initial jobless claims continue to decline. Inflation rose to the highest levels since 1991. The Federal Reserve Board of Governors, aka “the Fed” meets next week, and we will see if they are intent on holding interest rates at low levels.
We’ve seen inflation in a lot of areas, but one that makes people think there is a bubble is housing. Much like 2004 to 2007, houses are selling in a day or two, with multiple offers for over asking price, and escalation clauses. What’s different this time around? In the run-up to the 2008-09 financial crisis, people were given mortgages they really could not afford. “No doc loans”, or mortgages issued on someone claiming an income without any documentation to back it up, were prevalent. Negative amortization and interest-only loans were also common. A negative amortization loan is a loan in which you pay a small part of the interest due, usually 1-2%, and the remaining interest is added to your principal. So instead of paying down a mortgage, you’re actually increasing the amount you owe every month. There are legitimate uses for these loans. Business owners often have the necessary cash flow but can’t show required levels of income, and professional home flippers want to keep their carrying costs low.
The banking reforms passed after the financial crisis mean that mortgages today are harder to get, and we are reasonably certain the people taking out these mortgages will, without a significant change in circumstances, be able to afford them. We are also seeing cash purchases. In addition, the majority of homes being purchased are primary residences, not leveraged rental units or homes being flipped.
In addition, demographic-driven demand and low supply have contributed to the price increases. Millenials are reaching the age where they are starting to purchase homes, and housing starts were at a low point. It takes two to three years to get to point where a builder can begin construction, as they need to purchase land, develop plans, get permits, etc. It takes time to build new homes beyond just the construction you see.
The downside to this? Rent is also increasing across the board, impacting lower-income workers. Some families are being priced out of the market altogether. And for the first time in 38 years, a majority of Americans surveyed felt that this is a bad time to buy a house.
Your take-away from this? If you’re looking to buy a house, don’t get caught up in the frenzy and become house-rich and cash-poor. Consider what you can afford to pay. And consider what you really need in a house. Remember that housing costs should generally be no more than 30% of your income.
Your action to take this week is a follow-up to last week, when I asked you to write down everything you spent. Do that again this week, but stop and think first. Is this something I need? Is it something I want? Is there something I want more? Keep writing down every time you spend money, but for this week, think about what you’re spending.
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