How to Buy in a Hot Housing Market


I recently got an email from listeners listening about six months or so has listened to well over one hundred episodes of the show. He writes that he's relatively new to investing. He's been investing for three years now, as he graduated from college in two thousand seventeen. He's been saving for his first home purchase in Austin. Texas. He writes the Austin Housing Market is very hot at the moment arguably one of the hottest markets in the country even with the recent effects of covid nineteen. He points out the median sales price in Austin has increased over eleven percent since this time last year, and there are forty five percent fewer homes on the market now versus a year ago he would like to buy a house in early twenty, twenty one. But after seeing the market conditions, he's worried that he might be entering the real estate market at the wrong time. He has heard of stories from realtors in home buyers about individuals and families putting offers of ten to fifteen thousand dollars over the asking price for homes that aren't even on the market yet only to find out, they did not win the bidding war. In short, he continues I'm wondering if you could offer some. Rules of thumb to look for as a first time home buyer in I. Hot Market such as Austin. I'm conflicted because I don't want to buy at the wrong time and potentially lose value in my home only after a few short years however at the same time if this market to continue at this pace for several years to come buying in the near future, I think might be the right move. He points out he's tired of handing over his money to landlords and would like to start building equity in a home to diversify his current return drivers. Austin is not the only hot housing market. There are a number of them in fact, nationally in the US housing is on fire. In August of two, thousand, twenty, there were five point nine million homes sold on a seasonally adjusted annual rate. That's the highest number of home since two thousand six and it's being driven because the average thirty year fixed rate mortgage at the end, of August was two, point, nine, four percent. The median single family home price in the US is up eleven point seven percent in the past year ending August twenty twenty. That's the biggest annual increase in twenty thirteen. Sales of newly built homes are up forty, three percent year over year the highest increase since one, thousand, nine, hundred, two. There have been about one million new homes built in the past year highest level since two, thousand six. The market is being driven because of the low interest rate, which is pushing up the value of all assets. Plus there's a desire for many given covid nineteen to move out of their city, for example, out more into the suburbs or the country. So increased demand and reduced supply because of concern regarding the pandemic. Some. People don't want potential buyers traipsing through their homes. Others don't want to sell because they're not sure they'll be able to find something to buy. The frenzy to purchase homes has pushed up valuations if we look at the value of household real estate. So the total value of houses and condos as a percent of economic output in the US GDP, it's a hundred and fifty eight percent. Total value of all houses divided by GDP is one hundred and fifty eight percent that's up from hundred and forty percent at the beginning of the year the all time high was one, hundred, eighty percent in two, thousand, seven, and the recent low was in two thousand twelve of one hundred, fifteen percent. This is data from Ned Davis Research. The. So the value of the housing stock relative to GDP is approaching that all time high of two, thousand seven, and then if we look at the case Schiller Index, it has appreciated since nineteen fifty-three on a real net of inflation basis of about point seven percent per year. That's the trend line. So we statistically create a trend line again, data from Davis research that trend line increases at point seven percent per year, and then we can see well, how much do current prices differ from that trend line and right now we're fifteen percent above the trendline. In two thousand, six, US home prices were forty percent above the trend line and then by twenty twelve, two, thousand, thirteen, they had fallen two point, nine percent below the trendline.

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