The US housing market is doing quite well considering the various factors it’s facing. I’m mixed with exactly how I feel about the housing market in 2016 and moving forward, but let me give you my overall opinion.
Interest rates are an obvious downside to the current market. Yes it makes your house payment cheaper, but when the rates inevitably go up, it’s likely to cause your house to depreciate. If you buy a $250k house @ 4% interest rate, you will have a payment of $1,194 a month (on the mortgage only). If you take that same house and interest the rates to 5.5%, the purchase price will have to be $210k to emulate the same payment. That’s a big hit if you bought @ 4%, you’re facing a potential -$40,000 hit.
The question isn’t if but when on rising interest rates. I’m not convinced rates will go up more than maybe 1% in 2016.
Considering the interest rate factor, I should be bearish for 2016 on the housing market right? Well I’m not really that bearish and here is why. There tends to be a “lag” in housing prices and sales. In other words when the market does start a downward trend, it usually happens 6-12 months after the bad stuff actually happened (my opinion). That’s likely because it plays out like this:
- Everything is normal (people buying/selling)
- Something dries up buyers and over a few months inventory rises and people start “getting the message”
- People begin fire-selling their house after a few months of no biters (dropping price, which also tests exactly how many or few buyers are out there)
- All is realized that the market is cold and there is too much inventory and a lack of buyers.
- Banks start lending even less, removing even more buyers
The only thing that really is the wild card to this situation is inflation. If we have massive inflation, that’s good for housing largely. But that comes with a caveat, as my father says, “no one wins with inflation.” It’s just better if you have non-cash assets (usually).
I think 2016 might be a little premature for any sort of meaningful correction. I think rates will creep up to 4.5-4.8% over the year, maybe touching 5% briefly. I don’t see anything meaningful over 5%.
As for prices, I see minimal gains — but still positive. Everything is relative to where you are buying. I’m going to just toss a number out there. Nationwide 2-3.5%-ish growth (lower in places like midwest), high markets like San Francisco showing similar gains (but overall cooling.)