It is a complex time to be a young home buyer.
Mortgage rates are near-historic lows, which is luring many
people -- including first-time buyers -- into the housing market.
In 2020, sales of previously owned homes surged to their highest
level in 14 years, and many economists forecast sales to rise again
But the supply of homes is tight, and new construction can't
keep up with demand -- which means that buyers often have to fork
over a staggering amount to close a deal. U.S. house prices soared
12.2% in February from a year earlier, the biggest annual increase
in data going back to 1991, according to the Federal Housing
For millennials who are looking for a home, this means a tough
calculation. Many of them have limited funds and are carrying a lot
of debt. So, is it worth stretching their resources to buy a more
expensive house if they can lock in a lower mortgage rate for years
Or should they wait until housing prices cool down to more
affordable levels -- and risk having mortgage rates rise in the
meantime? Already, rates recently hit their highest level since
June, and many economists expect them to continue creeping upward
Debating the issue are Susan Wachter, a professor of real estate
and finance at the University of Pennsylvania's Wharton School, and
Laurie Goodman, vice president for housing finance policy and the
founder of the Housing Finance Policy Center at the Urban
YES: Interest rates are low and housing prices are unlikely to
By Laurie Goodman
Interest rates are at near-historic lows. There have been only
eight months in the past 50 years when rates were lower than they
are now -- and those eight months were all during the pandemic.
That is why this is an ideal time for young people to stretch
themselves financially to buy a home.
While home prices have increased dramatically over the past
year, and might seem high by historical standards, they're unlikely
to come down, as houses are in short supply. Interest rates,
meanwhile, are likely to rise.
Young people who want to become homeowners should take advantage
of the situation to lock in their mortgage payments for the next 30
years, essentially inflation-proofing their housing costs. Having a
stable housing situation is crucial. Landlords can raise the rent
to an unaffordable level or refuse to renew the lease for any
number of reasons. If young people remain renters, they can expect
their housing costs to go up each year, perhaps faster than the
rate of inflation, especially given the tight housing supply. Even
if a mortgage payment is a stretch for young people today, they
will grow into the payment, as their income is likely to rise over
There's another crucial advantage to homeownership: It remains
the best way to build long-term wealth. Even though many young
people saw their parents go through the great financial crisis,
with home values down 25% from the 2006 peak to the trough in 2012,
home values are up 73% since the 2012 lows and are 29% above the
previous peak, according to Urban Institute calculations based on
data from mortgage-technology and data firm Black Knight. Bidding
wars are erupting in many markets because of low supply.
Some argue that the current appreciation rate in home values is
unsustainable. But the housing-supply shortage and production of
new units that is low by historical standards suggest that values
will continue to rise. And even if the rate of appreciation
slackens, home buyers can still see strong returns on their
New borrowers, on average, put down about 5% of the home's cost,
financing the balance with a mortgage. If the borrower puts down
5%, or $10,000, on a $200,000 home, and the home increases a modest
3% annually, the home would be worth $231,854 after five years. The
five-year return on the borrower's $10,000 investment is 316% -- a
figure that you're unlikely to get with a $10,000 stock-market
investment. The earlier a young person can stretch to access
homeownership, the more time they will have to accrue the benefits
of this leveraged investment.
Of course, homeownership isn't the best option for everyone.
There are transaction costs, in the range of about 8% -- 5% for
buying and selling the home and 3% for various mortgage closing
costs and expenses. This suggests homeownership isn't ideal for
people who intend to move within a year or two, as the transaction
costs outweigh the wealth-building benefits. But geographic
mobility has been declining, with millennials moving less often
than their parents did at the same age.
Some may also say that we're heading for a debt bubble -- a big
driver of the last housing collapse. But mortgage debt is way down
right now, and other debt is nowhere near the levels it was before
the 2007-09 recession.
Finally, critics bring up a potentially huge downside to buying
a home: If a financial crisis hits and you get laid off, you might
miss your mortgage payments and stand to lose your house. But even
if you do lose your job, you're not stuck. In most recessions, home
prices don't decline -- so you will likely be able to sell your
home without taking a loss and downsize to a less-expensive
Bottom line: If a young person interested in homeownership has
the opportunity to buy a home in this low-interest-rate
environment, they should do so. There is no guarantee that interest
rates will stay this low for long, and the earlier homeowners start
building equity, the better.
Ms. Goodman is vice president for housing-finance policy and the
founder of the Housing Finance Policy Center at the Urban
Institute. She can be reached at firstname.lastname@example.org.
NO: Rates are low, but don't count on home prices continuing to
By Susan Wachter
Mortgage rates, under 3% for most of the year, continue to
remain below levels not seen since the 1950s. Amid these low rates,
Covid-19's acceleration of the adoption of remote technology means
that young home buyers have more freedom to move to areas where
they can work from homes that are more affordable and offer a
higher quality of life. It also means young home buyers may be
inclined to financially stretch themselves to take advantage of
these once-in-a-generation rates. That would be a mistake.
Homeownership is a proven wealth-building asset, and a way to
avoid rent inflation, and a 30-year fixed-rate mortgage at today's
low rates is generally a safe product. And prices today are rising
at a rate of 12%, the highest rate since 2006. But stretching
financially and taking on the risk of not being able to pay the
mortgage means young buyers are betting on housing prices
continuing to rise.
Low rates and tech-driven demand are fueling the blistering rate
of housing-price increases, but this past year's appreciation rate
isn't sustainable. Future volatility cannot be ruled out if, for
example, interest rates and mortgage rates rise. It is a seller's
market now due to these significant demand drivers facing
historically low inventory and high construction costs, as well as
a limited supply of developable land. Still, a seller's market can
shift to a buyer's market quickly.
As the experience of a decade ago shows, housing prices can
plummet -- and fast. Upward price pressures can be incorporated
into expectations, which make dramatic drops in price rises more
likely when expectations reverse. In the 2007-09 recession, more
than eight million households lost their homes to foreclosure in a
systemic crisis brought on by overleveraging, according to data and
analytics firm CoreLogic.
The price bubble before the financial recession was driven by a
debt bubble, giving credence to caution by new home buyers to avoid
overextending their borrowing and payback capacity. This is an
issue for younger buyers who have other debt, such as student
By treating housing like any other financial asset, a homeowner
neglects the reality that, in an adverse scenario where they cannot
repay their mortgage, they stand to lose more than an investment;
they stand to lose their creditworthiness and their home.
Stretching to borrow can seem like the right thing to do, to take
advantage of low rates, especially when young buyers think about
all the years they have to both pay down the mortgage and to
increase their earnings. But buyer's remorse can take over if and
when housing prices plummet, especially if this occurs along with a
In a recession, loss of jobs and housing-price declines can both
make it impossible to pay back your mortgage and can wipe out your
equity. The loss of a job for even one jobholder in a household can
make it difficult to pay back the mortgage. A recession is likely
to see more distressed sales as a result. These sales, in turn, can
weigh on the housing market, causing prices to fall, making it more
difficult to recover equity.
A destructive cycle
In fact, the worsening outlook can lead to negative feedback
loops as price declines undermine household wealth, and the
financial sector itself is exposed to mortgage losses and pulls
back on lending, and both worsen the economic outlook. Younger
households have more financial burdens and less current earnings
and would be less likely to be able to weather this.
During the pandemic, housing prices have outperformed many
investments, and in the long run, ownership is a means of building
wealth. But stretching to buy a house or to buy too expensive a
house may put the young homeowner in a precarious position.
Ultimately, the notion of stretching one's means to take advantage
of low interest rates or other affordable lending products will
continue to be a gamble with potentially devastating impacts to the
young home buyer and the overall economy.
Prof. Wachter is a professor of real estate and finance at the
University of Pennsylvania's Wharton School and co-author, with
Adam Levitin, of "The Great American Housing Bubble: What Went
Wrong and How We Can Protect Ourselves in the Future." She can be
reached at email@example.com.
(END) Dow Jones Newswires
May 04, 2021 09:14 ET (13:14 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.