Reasons Why The Housing Market Won’t Crash Any Time Soon
Reasons Why The Housing Market Won’t Crash Any Time Soon
07/22/2021 by Financial Samurai
For existing real estate investors, you should feel great about the risks you took to buy. It takes discipline to save up for a down payment. It also takes guts to buy a large asset with debt. My default recommendation for real estate is to hold on for as long as possible.
For new real estate investors, things are a little trickier. With strong demand, low inventory, and higher prices, you need to be careful running with the herd. Good economic times have clearly returned.
However, getting into a bidding war where you’re the only one out of 20 people willing to pay way over ask has its risks. The housing market won’t crash any time soon. But, if you buy a property this way, it might not appreciate for years as the market takes time to catch up to your top bid.
Let’s review some reasons why I believe the housing market will likely continue to stay strong for years. I assign a 90% probability the housing market will not crash (a 10% correction or greater) within the next three years.
I also believe with a 90% probability the housing market will continue to make new highs for the next three years in a row with on average high single-digit YoY gains. Single-digit YoY gains means that the pace of price growth should start moderating. If I’m wrong, then I will suffer the consequences as anybody with skin in the game does.
Home prices for May 2021 chart, up 26% YoY - Why The Housing Market Won't Crash
1) Rates Will Stay Low For Longer
We are in a permanently low interest rate environment. Interest rates have been coming down since the 1980s thanks to information efficiency, technology, global coordination, and learnings from previous cycles. Productivity gains have also been massive over the years.
All the economists and lenders who have urged you to take out a 30-year fixed-rate mortgage because rates might go up have been proven wrong. In 10 years, they will be proven wrong again if they continue to encourage a 30-year fixed mortgage. The average duration of homeownership is only about 10 years. There’s no need to pay more interest than you need to.
We all know that inflation is higher than what the government is reporting. Yet, despite record high prices in many asset classes, the 10-year bond yield still remains below 2%. That is an important figure because 2% is also the target inflation rate by the Federal Reserve.
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