Thoughts From a First Time Home Buyer

Last week, my wife and I bought our first house. We initially signed the contract about 3 months ago and have been dying of anticipation ever since. Actually, it wasn’t 3 months, it was about 76 days and 18 hours. I know because my wife set a countdown on her phone for our closing date the day we signed and has reminded me of how many days were left every morning since!

I’ve been excited as well, of course. I love the house as much as she does, and it’s a big step for us going forward. But I wasn’t always as enthusiastic about the idea of home ownership.

Since my days often involve analyzing investments, I looked at home ownership more through that lens, and wasn’t all that impressed. According to the Shiller Real Home Price index, home prices haven’t returned much more than inflation. Of course, that return has accelerated in recent years, as seen below.

This index also doesn’t include all the costs to home ownership, such as taxes, upkeep, insurance, closing costs, etc. So, to me, the prospects of owning a home seemed overblown from an investment standpoint, and I was enjoying some of the flexibility and convenience that come with renting.

So what changed?

Well for starters, our financial situation has changed. It’s easy to scoff at the investment prospects of home ownership, when you really can’t afford the house you want anyway. Fortunately, as we’ve progressed in our careers, our income has increased, debt has declined, and we’ve been able to set aside savings that make buying a home feasible.

Second, our life stage has changed. Having a small apartment has suited our needs for the time being, but of course at some point…we’re going to need some more room.

But for myself, who still prefers to focus on the numbers rather than on some romanticized image of home ownership, the third reason is that it makes more financial sense now than ever.

The cost to get a mortgage, represented below by the 30-year mortgage rate has never been lower.

The Federal Reserve has been buying all sorts of bonds over the years, including mortgage backed securities. This has put pressure on interest rates to continue to get lower. After the economy was frozen due to COVID-19, this pressure increased in order to stimulate the economy back to health. It’s not an accident that home buying and refinancing is booming due to low interest rates, it’s the intended result.

How much more affordable does lower mortgage rates make owning a home? The chart below shows the median sales price for new homes (in blue), as well as the median monthly payment both before and after inflation (orange and gray respectively).

What the chart shows is that the sales prices for homes continues to go up rapidly, while the monthly payment to own that home goes up much slower. In fact, the gray line, which adjusts the monthly payment for inflation, shows that the cost to own a home has barely gone up since 1971!

Of course, interest rates could go even lower, and home prices oddly haven’t come down from COVID-19 as you’d typically expect in a recession. So the best time to buy a home could certainly be ahead of us. But regardless of when that time is, it’s certainly a favorable environment to buy now.

Interestingly, there may be some sound arguments for why housing could be a good investment for the foreseeable future, despite the mediocre track record I discussed before.

If the Fed remains accommodating for the years to come, which I’d expect, interest rates will stay low for a long time. This will continue to make housing affordable, even at higher home prices.

A narrative that’s been discussed a lot since 2008 is that the supply of houses is constrained. U.S. housing starts, construction permits, and new single-family houses for sale are just some of the many statistics that haven’t recovered since the 2008 housing crisis.

On the demand side, the largest age cohort in the U.S. currently is the 25-29 age demographic, of which I’m a part of. If you assume many like me are entering the years where home ownership make sense and is feasible, you’ll have a lot of potential home buyers buying a shortened supply of homes.

I would be thrilled of course if my home appreciates rapidly, but it’s a bonus and not why we bought the house. I also recognize that the opposite is possible. Rates could go up, economic growth could remain depressed, and the price of my home could go down. If you look at the first chart in this blog, you’ll find plenty of long periods where this happened.

Regardless of the investment implications, my wife and I are looking forward to the memories we’ll make in our new home.