Is it a bad time to buy a home now?

Question

I was just listening to a financial radio talk show and they said home buyers in this market (I’m in Boston) should be aware that they are buying at potentially the edge of a bubble and if they buy now should not plan to sell for at least 10-15years. They stressed that your home is not an investment.

Thoughts?

Russell Brazil · Answer

Anyone who thinks prices are going to come down in mass needs to take a look at the US money supply. 35% of all dollars that exist were created in the last 13 months.  For perspective, in 1971 the US money supply increased by 10% in one year, which caused such harsh inflation, that housing priced trippled in the 1970s.  Our problem is not an asset bubble, our problem is an inflation problem.

Simone G. · Answer

@Bob Ross

The factors that contribute to an investment being worthwhile or not are not as complex as people think.

People complicate these factors in an attempt to delegate responsibility to non-emotional rationale and maintain loyalty to the "does it pencil?" strategy; this is as futile as a seatbelt on a bull.

Simply, an investment is a good investment if it costs less than market value and appreciating it up to, or beyond market value, either forced via a reno, or over time organically, costs less than comparable ARV properties at the time of acquisition.

That's it.

There will be bubbles. There will be recessions. There will be a deadly beer with a virus that shuts down humanity worldwide. Stuff happens.

I know of investors who overpaid for a property because they got wind of their competition, and wanted to "win" - that is not a "the numbers have to pencil" strategy. That is ego.

I know of other investors who would not write on an absolute gem of a deal because the property happened to be on a street with the same name as their ex girlfriend - also not a "the numbers have to pencil" strategy. Also ego.

So no matter what the market is doing; what type of property you're pursuing; and where you are located, whatever reasons people cite to pursue or not pursue a property are arbitrary - because candidly, we all lie to ourselves a little bit as to what motivates us to do this and not that, and if you think you don't, you're also lying.

Golden rule: Can you buy for less than its comps, and assuming yes, can you appreciate it up to market value for less than what it would cost ARV on market?

That's it.

If you are a human on this planet, you will be victim to bubbles and recessions and unplanned acts of god that influence the value of your asset.

For fun, in 1999, the most brilliant investment minds, in positions of the most advanced and privileged access to market analytics, projection tools, education and resources, maintained that a little startup called Amazon is in a bubble because no way could one company "sell every book in the world today".

They failed to anticipate that one day Amazon would not be selling books. They couldn't' even fathom today's e- commerce landscape.

Real estate is no longer just about property and land. It is about a fluid and diverse asset that we may not be able to fully anticipate its optimal value and application five, ten years twenty years down the road. If you argue it is exclusively about property and land, you are building saddles in a Model T world.

AirBnB was founded in 2008 and in December of 2020 IPOd with a $75 billion valuation. WeWork was founded in 2010, and its value plunged from $47 billion to around of $10 billion in weeks after SoftBank's acquisition. A lot of smart people with a lot of money with a lot of access to "bubble spotting tools" still messed that up.

If you stick to the golden rule, accept that you're human, you'll be alright. Hope that helps.

Stephen Brown · Answer

I'd say that buying now isn't very risky as long as you buy right. If you can get a discounted property then why not purchase? If you're doing a buy and hold with a property like here in Toledo, you can purchase it for 50,000 and rent it out for 750 per month for 30 years... So essentially, in the long run it's very hard to lose.

Patrick Flynn · Answer

@Bob Ross There are different schools of thought on whether your home is an investment or not. Personally, I believe it is even if you are not renting any part of it out. No matter what you do you are going to have to live somewhere. Home Ownership gives you many tax benefits that renting does not. If you lock in a fixed rate at 3%, you are protecting your money against from inflation since the amount you are paying will be the same 30yrs from now but worth a lot less value wise. Rent is only going to continue to climb during that same 30 year time period. With a home you are also building equity and you can most likely sell you home for a profit in the future. If you want to move, but not sell your home you can rent it out. You can also use your home as collateral to get capital for other properties or other business ventures. There are many different things you can do with a home once you control the asset. For these reasons your home should be viewed as an investment. As the old saying goes "when is the best time to plant a tree...20 years ago" Hope this helps!

Jason Bee · Answer

Hi Bob, these are truly unprecedented times and the Massachusetts market is different from other states. I have been trying to buy a muli-fam in the Boston area for 2 years and it is crazy what people are asking for. Houses we were competing for last year we can't even compete for now. I have talked with numerous Real Estate agents and they all seem to have never faced anything like this. Follow the economists, they predict the market and are the best way to gauge our economic future. I like many others thought this was a bubble and so far have been proven wrong. There is a housing shortage in our area (NE), period. Not enough new houses being built because there is a shortage of skilled labor. The cost of lumber has gone up because more people want to do home projects which is continuing to drive up costs. So we are left with the people who already own, that supply chain has been tight for the last 2-3 years because of people's concerns with awaiting the next recession. Now with covid it made that problem more exaggerated. You have people who would sell but are worried about where they will live after because of the housing shortage so they won't sell until the market gets better. We also have a waiting baby-boomer population, ready to retire but can't go anywhere because there are no homes to buy in the retirement communities like in Florida. All of this made our New England housing market crazy. I would focus on our area of New England, one of the most sought after areas in the US. Mass bounced back quicker than most of the states in the last recession. We are a different animal than the rest of the country, lots of people are moving & want to live here. Our market is different. If you are going to buy in Mass, I would use it a long-term investment but I'm not into flipping and short investments. We may have this problem for years and inflation will happen, just a matter of when. If you have the finances to do a quick flip and do your math out, allowing for decrease in value and if you feel comfortable, whether you have to stay in the house for a cpl years or not, go for it. I think other states may face a bubble sooner, and if we are in one, it won't pop here until more people retire and we have a lot of those retirees homes hit the market. Also should see if once covid is over, will people relax more and stop panicking. Instead of immediate gratification, will people calm down and actually look at the house they are buying and start being more sensible with their offers. It's tough out there no matter what. All the best of luck.

Adam Sankowski · Answer

All I can say is that I bought in Somerville in 2013 and it seemed like prices were crazy and could never go higher... now after 8 years of our 2 family appreciating well over 100%... in Boston it’s never going to be a good time to buy and the market will never cool off so jump in! And yes, if your dropping over 100k on a down payment you should make sure that the numbers work so that you don’t have to sell for 10-15 years.

Prices aren’t dropping that much though. If they go down even 5-10% there are 20 more people per each house ready to jump in. Also the fed has promised to keep interest rates low for the next few years and that will keep people buying.

And yes if you buying just a single family it’s not really an investment but if you’re house hacking a single family with an Airbnb in the basement or a 2+ family house then it’s absolutely the best investment you can make in your lifetime

Brad Hammond · Answer

Hi @Bob Ross, I can understand that people are scared right now with people paying $100k over the asking price and waving the appraisal contingency but I don't see any proof of a bubble.  These people are qualified buyers and can afford their monthly payments.  I think that if you are planning on staying in your home for over 5 years, this is a fantastic time to purchase a property.  People will be looking back at these times and wishing they had purchased more.

With interest rates being this low, it is a once-in-a-lifetime opportunity to purchase with interest rates in the 3% range.  That is part of the reason why people can afford to pay more for a home right now.  People have been calling for a housing market crash for 10 years now and it hasn't happened yet.

While your home is not an investment, an investment property is an investment.

Justin Hoggatt · Answer

I believe that there are a lot of unknowns right now and it has everyone on edge, including the radio talk show.  With the current state of increase in offers over asking price and the demand exceeding inventory, it certainly seems like it 'could' be a bubble situation.  There are many factors at play including how the new President will continue his decision making and how that will effect everyone.  Right now, with the amount of money being printed and distributed, there has to be a recourse on that decision.  I'm not sure most of us are able to calculate that or privy to the details on how that will play out.  In my mind, I see a destabilization of the dollar, increased inflation, and a general lack of regard to money in general when offers are $100,000 over asking!?

As a direct response to your comment, I don't believe we would need to hang on for 10-15 years before selling, unless there really is another Great Depression coming (again, how do we know?) and in that case, it's possible.  But, we're only 13 years removed from the Great Recession and look where we are.  It took maybe 5 years for many areas to bounce back and even more areas have bounced back in a huge way.

I just created a Podcast about how your home is not an asset.  Yes, it goes into your net worth which is important, but an asset is a piece of property (RE or tangible) that makes you money above and beyond any liabilities.  Here is a definition pulled from Google which I like: "property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies."  You're home? Does not provide that unless you sold it and pulled the equity out, and until that time it's a liability and typically is paid for out of other proceeds you receive either from another business, investment, or return of value for your time.

Tony Angelos · Answer

@Bob Ross I'll bring up a counter point that I don't believe has been brought up yet.  Commercial real estate has been obliterated during COVID.  Simultaneously, the continuing printing of money has increased the desireability of inflation protected real assets. This has historically been Real Estate, but with large swaths of  CRE being seen as undesirable at the moment, much will continue to be  pushed into residential. Aside from that, lumber cost is up 300% or something from the same time a year ago. This alone attributes to something in the range of +$16,000 replacement cost of a standard american single fam home. Higher in more expensive markets. As build costs rise, inflationary practices continue, and commercial real estate remains undesirable, I think there is a strong case for continued appreciation in residential real estate.

Robert M. · Answer

Ask a real estate broker and they might tell you now is a great time to buy, but (most) they're not buying.

Ask an investor and they might tell you to proceed with caution, many lost money in 08 crash.

Ask me and I would say no one knows what the future holds as it hasn't happened, yet.

If things seem too expensive its probably because they are, buyer be ware. What's the harm in waiting another year?

Is it a bad time to buy a home now?

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