Being a first-time home buyer in today’s market can be intimidating. Home prices have soared to new highs and mortgage rates have climbed steadily over the past few years. As someone who’s in the market for their first home, I wanted to give you insight on the current market and explain why I don’t think prices will crash any time soon.

Supply Shortage
The real estate market is facing a notable supply shortage, driven by a few key factors. Data shows that housing inventory levels are currently about half of their 20-year average (YCharts). This shortfall is one of the main reasons home prices continue to go higher.

Mortgage Rates
Many homeowners are “locked in” to their existing mortgages at historically low rates. For instance, those with a 3% mortgage rate are reluctant to sell their homes and take on a new mortgage at the current rate of around 7%. The combination of elevated mortgage rates and rising home prices would make it costly to move.

Post-2008 Construction Slowdown
In the aftermath of the 2008 financial crisis, homebuilders became more cautious due to stricter lending standards and the desire to avoid losses. As reflected in the chart below, the 2010s experienced a significant decline in new home construction.

US Housing Starts

These factors combined have created a significant supply shortage in the real estate market, which has increased competition among buyers.

Increased Demand
The largest demographic, millennials, are in their prime buying years. Recent data shows they make up 38% of all homebuyers. The large Millennial and Gen Z demographic will likely continue to keep the demand side strong. If inventories continue to stay low, it’s likely prices will stay elevated.

Strong Consumer Financial Health
The last housing crash was primarily driven by individuals buying homes they could not afford. Since then, lending standards have become stricter and today’s buyers generally have much higher credit scores than in the past.

Additionally, the ratio of housing debt to disposable income remains near all-time lows (See below). This means that households, on average, are spending a smaller portion of their disposable income on housing-related debt.

Household Debt Payments as a Percent of Disposable Personal Income

While circumstances could change, the average household is still in a strong financial position.

Higher Standards of Living
The homes we buy today are not the homes our grandparents were buying. Back then, it was much more common to have a home with less than 1000 sq feet. Oftentimes two to three bedrooms with no basement or garage. These homes often lacked the amenities we are accustomed to today.

Today’s homes are much bigger and luxurious than those of previous generations. In my opinion, our generation has a higher standard of living, which is one of the reasons home prices are higher than they were in the past.

Bottom Line
While market conditions can and will change, don’t count on home prices going back to pre-pandemic levels. It’s possible prices will stagnate or even decrease in some areas, but a crash is unlikely.

Your home purchase is likely your largest expense, so it’s crucial to get it right. If you want to buy a home, make sure you want to live there at least 5+ years and can afford to service the debt. Don’t buy banking on lower rates or large salary increases. If you need help determining how much you can afford, please don’t hesitate to reach out.

George Maroudas, CFP®

George Maroudas, CFP®

Twitter @ChicagoAdvisor

Disclaimers / Sources:

US Existing inventory 1.21M as of April 2024. The 20 Year average of 2.263M. Data from YCharts.

30 year fixed mortgage rate of 7.29% as of 5/31/24 from Mortgage News Daily.

Millennials make up 38% of home purchases from the National Association of Realtors.

Housing debt as percent of disposable personal income from the Federal Reserve Bank of St Louis.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.