There are a lot of headlines surrounding housing right now. With rising interest rates and inflation, many are wondering if it is a good time to buy a home. We asked internationally renowned economist Elliot Eisenberg, PhD., about his thoughts on the housing market, the overall economy, and where we stand historically.
Q: Housing markets are cyclical; how does our current market compare historically? Where do the current interest rate conditions fit into the historical context?
A: Housing is not in any shape, way, or form overextended. As a matter of fact, it really never got on track after the crash in 2008, where builders could make up for the undersupplied housing market. Housing was never able to fully take advantage of the low rates we had in 2020 through 2021. Homebuilding activity increased, but it couldn’t make up for the undersupplied market because you couldn’t get land, you couldn’t get labor, and you couldn’t get parts—like everybody else during the pandemic.
Other places and other industries were able to work around it a little more, but housing was never really able to take advantage of the low rates. So, I’m not sitting here terrified that it’s going to collapse and be awful. In terms of interest rates, they’re well up from where they have been at above 5% on the 30-year mortgage, but this is hardly high by historical standards. For people who were 35-40, looking to buy a house and only knowing low interest rates for the last 10 years or so, these seem high. But for people who are 50-60 and have been through a couple cycles before, they’re still saying, wow, it’s a pretty good rate.
Q: What options are out there for purchasing or helping lower a monthly payment? What finance and mortgage tools should people be aware of?
A: You actually have a few choices. You can go with a shorter mortgage duration, a 20-year mortgage or a 15-year mortgage, and get a lower rate. The problem there is the payment goes way up and many just can’t afford that. The alternative, is to get an adjustable-rate mortgage (ARM) like a 5-, 7-, or 10-year ARM. The first term in that mortgage tells you how many years are fixed at a certain rate. Then, every year after it may adjust rates.
Those options are good for people who may not stay in that home for 30 years. For example, you get married, you have a kid, then you have a second kid, and suddenly your house is too small and you want to move. You got a 30-year mortgage five years ago when you bought your house, but you may have overpaid for that mortgage. You bought insurance for 30 years of fixed payments when you’re not going to be in that house for the full 30 years. So, bite the bullet, admit if you’re not going to stay in the house for 30 years, get an ARM, and save yourself 5 to 6 basis points. Moreover, during that 7-year time, rates could fall and you could refinance.
Q: We hear about the challenges in this type of housing market, but what are some of the unique benefits or incentives to buying a home in this market?
A: Right now, the market is improving for buyers. Inventory is starting to rise—it has been very low, for a very long time. In terms of housing units, physical units of available-for-sale inventory hit rock bottom just a few months ago and it is now finally rising. So, if you’re looking to buy a house, this is the best time in a very long time. There is still not as much inventory as there’s been in the past, and it’s still not back up to a normal level, but it’s better than it’s been for two years. For example, if you are selling an entry-level house to buy a step-up house because you need more square footage, make more money, or are a little older, it’s a great time to do it. There’ll be more houses to buy and to look at to purchase. Moreover, homebuilder inventories are up. So, you can go to a builder and say ‘hey, what do you have available?’ More ready-to-move-in new homes are available, and they were not available as recently as a few months ago.
Q: We also often hear the world ‘bubble’ in this market. Are we in a housing bubble?
A: The answer is unequivocally, no. We think of the housing bubble because, as we all may remember, the housing bust of 2007 led to the recession of 2008. This is not that recession. This is not a recession brought on by the housing market. There was a credit bubble, which exacerbated the housing problem and so on: the builders overbuilt, the lenders over-lended, the appraisers over-appraised, etc. Now there’s a shortage of houses and the demographics for the market are ridiculously favorable, with the youngest millennials who are now 30 years old, roughly aging into homebuying at 34. There is terrific demand from that, so this is really in no way at all comparable.
Don’t look at 2007 or 2008 as any form of guideline by any kind. No, no bubble.
Q: What advice would you share with homebuyers touring the Parade of Homes?
A: This is the best time in a long time to buy a house. The conditions are becoming increasingly favorable to buyers. Acknowledge this, be aware of this, and behave accordingly. This is not the market as recently as three of four months ago, when you had to forego inspections and had to just say ‘yeah, here’s my money.’ Now it’s different. Take your time, be a little bit pickier, and be a little bit more deliberate. You have more time to make your decisions, so take advantage of it. This is likely to improve as we go forward as well.
Q: Could you define some common mortgage terms?
Fixed-Rate Mortgage – The standard type of mortgage is fixed-rate. With a fixed-rate mortgage, the interest rate stays the same for the entire term of the loan, as do the borrower’s monthly payments toward the mortgage. A fixed-rate mortgage is also called a traditional mortgage.
Adjustable-Rate Mortgage (ARM) – A home loan with an interest rate that adjusts over time. Generally, an ARM will start with a lower interest rate than traditional fixed-rate mortgages for a specified period, after which the rate will change. ARMs can be refinanced to a fixed-rate mortgage if the homeowner wants stability in their monthly payments.
7/1 Adjustable-Rate Mortgage – A home loan with a low interest rate for a fixed period of seven years, after which the rate will change once per year.
7/6 Adjustable-Rate Mortgage – A home loan with a low interest rate for a fixed period of seven years, after which the rate will change every six months.
Refinance – Obtaining a new home loan on the outstanding balance of the current mortgage, commonly for better terms (lower interest rates, fewer years).
About Elliot Eisenberg
Elliot Eisenberg, Ph.D., is an internationally acclaimed economist and public speaker specializing in making the arcana and minutia of economics fun, relevant, and educational. Eisenberg, a former senior economist with the National Association of Home Builders in Washington, D.C., serves on the Expert Advisory Board of Mortgage Market Guide and is the chief economist for GraphsandLaughs, LLC, a Miami-based economic consulting firm that serves a variety of clients across the United States.