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Buying a house is a good investment

Buying a home is a good investment in general. That might seem obvious, but during uncertain times like these, that advice is sometimes worth repeating.

Much has been written about how the commercial real estate market will be the next crisis to hit, assuming we make it through the situation with the banks, the high interest rates, and the debt crisis. Commercial real estate has indeed taken a beating, particularly office spaces in many large US cities like New York, San Francisco, Los Angeles, but in some places where supply did not outrace demand, the situation is better. Admittedly though the work from home and quiet quitting trends after the COVID pandemic have taken its toll on the office space sector. There are many vacancies in large city office spaces, and there is no easy fix for that at this time.[1]

The situation is a bit different with housing in most areas though. Because housing construction starts slowed down during the pandemic, and because many families wanted to avoid close cramped quarters that could increase their chances of infection during the COVID season, the demand for housing in suburbs and less crowded towns and cities skyrocketed. There has been an increase in migration towards smaller less crowded cities, aggravated by high crime rates in places like San Francisco and Chicago and a desire by families to have their kids experience a more stable environment.

Many real estate developers are sitting tight at the moment because of difficulty in getting debt financing for many of their projects. A lot of the smaller banks who normally deal with Main Street America are having lower asset value problems because many of them are holding older pre Fed hike long term treasuries yielding less than current treasuries. They are also quite picky at who they will loan to since they can’t really afford defaults at this time, especially if they are also holding office spaces that are mostly vacant. Debt financing is definitely hard to get these days.

For single owner homes, potential buyers are still turned off by the high mortgage rates that are almost in the 7% range especially if they compare that to people they know who are holding 3% mortgage rates just a few months ago.[2]

Although once they realize that the Fed is not really going to lower rates anytime soon, and they have found a house that they really like that they don’t want to let go of, they may sign up for the higher rate mortgage anyway, especially if they have equity saved up so their payment period is shorter. Right now though, most people are just waiting to see what will happen, especially when short term treasuries are yielding around 5%. Sitting on short term treasuries now is not necessarily a bad move.[3]

For those buying houses, even if they will be paying higher interest rates on their mortgage, it may still be better than paying for rent which is an expense. That’s because they are investing in an asset. Plus the rent itself is also rising because of inflation, especially in a tight housing market.[4]

Most Americans have their main net worth tied to the value of their homes. Aside from being the place where family memories are made over the years, as an asset whose value generally rises it can still be sold if the owner needs to move elsewhere. Note that home prices vary from year to year, depending on the area, and the supply and demand dynamics of each location.

As a general rule, buying a home versus paying rent is a good idea if one can afford it. Especially if the house is hard to find and might suddenly disappear from the market once lower mortgage rates do reappear.

If the buyer has the money and there is demand, consider that construction materials are cheap at the moment relative to previous price levels. Lumber right now is hovering this May 2023 in the $340 per thousand board feet spot price compared to May 2021 when it reached around $1,600 per thousand board feet.[5]

Also since there are few projects and contractors are looking for work, they may sign on to build the house for lower than their usual rate. If the house has been built, one might be able to haggle for a good discount if the seller wants to move out and can still make a profit from the sale.

Although technically housing is a discretionary purchase because one can always rent, it is part of the American dream. Its value for a family goes beyond the monetary side. Because of that, buying a house still promises to be a good investment for decades to come.

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