With soaring mortgage rates surpassing 7% for the 30-yr fixed, first-time home buyers are getting squeezed to the brim, delaying their chance to finally put down roots.
Although it may be frustrating to not be able to own a place outright in your name year after year, we must not forget to count our blessings. Living in the U.S. gives anyone a major leg up in itself. It’s only a matter of time before home prices will start to cool, presumably once the Fed starts to hit the brakes on its aggressive hikes.
Since Q3’22, the number of potential home buyers reached an all-time low due to a lack of inventory on the market, froth, speculation, and higher prices, all impacted by the Fed’s record moves.
Real estate is unlike any other high-flying funny money investment since you’re dealing with tangible assets. No cryptocurrency or shares of your favorite FAAMG that may plummet in value overnight.
There is far too much uncertainty to handle in the equity market and if you feel the same way, it won’t hurt to reassess your risk tolerance and asset allocation breakdown to make sure you aren’t taking on excess risk you aren’t able to stomach.
Although prices are elevated and deals are still scarce, the housing market is bound for a cooldown in 2023. In fact, I predict home prices to decline significantly by 5–15% as we head into the deep winter months when only eager sellers need to get rid of their properties and will be willing to take any bid to move on.
Although the housing market is an interest-rate-sensitive sector just like with growth stocks, it is still far more predictable as a lagging indicator. It trails the market by a couple of months making it a safe haven for a long-term investment able to ride out any storm.
First-Time Homebuyer Slump
Over 80% of first-time Millennial homebuyers from the peak lockdown days of 2020–2021 are now dealing with the price crunch and regrets from their rushed home buying spree when rates were at bottom-rock levels. On the other hand, those who patiently waited for the storm to pass and didn’t get blindsided by the lucrative sales and cabin fever are now facing another dilemma… Too high forecasted costs.
Although the housing market can be tough to time or wait on, what is certain is that rates will never stay at the same levels forever. Whether they are at historic lows or highs, as investors, we should always know that what’s priced into the market is based on future expectations, and factors are bound to change, especially when it comes to the Fed’s plans.
Out of all U.S. homebuyers so far this year, only 26% were first-time buyers. This drop is quite significant given most Americans and mainly Millennials, the generation who are most likely to buy first-time properties, are heavily swayed and impacted by the direction of rates.
This represents a 34% drop from 2021 according to the National Association of Realtors. Given inflation has finally shown signs of peaking after October’s released CPI and PPI report, this is positive news for risk assets and real estate as rates may not be hiked as high or at the same pace as anticipated in 2023. As a result, the FFR will most likely come back down to ~4% by 2Q ’23 loosening inventory and finances for prospective buyers + sellers.
Millennials have gone through their fair share of financial hiccups in the past. Unlike my generation, Gen Z, they witnessed the dot-com crash as kids, GFC of 2008 as teens, and covid-pandemic as working adults. This explains the bump in age for first-time homebuyers now at 36 yrs old.
Although we may be able to blame the Fed, never fight it especially since a rate hike’s effects take time to trickle down into the housing market. For now, don’t stop hunting for deals, especially into the winter months when you may find the best deals of all year, possibly leftovers from Black Friday!