By Jesse Vaughan and Jess Zhao
Focus on buying a home that you can afford in a place you want to live – and be ready to commit.
A question we are often asked at Landed is, “When is the right time to buy a home?” It’s an important question to consider – but in most cases, the answer doesn’t have much to do with market timing.
One important caveat before we take off: while we have an all-star team of financial analysts, housing policy wonks, and entrepreneurs, we don’t know for sure what the future holds. In fact, for most people, the answer to “when to buy” doesn’t have much to do with predicting the market. Instead, we advise people to focus on two factors:
- Whether or not you feel ready to make a long-term commitment.
- Whether or not you can comfortably afford the ongoing costs of homeownership.
Although we encourage all buyers to consider the above factors first and foremost, we’re still asked all the time what we think is going to happen to the market. In this post, our goal is to provide just a little more insight into how we look at housing prices and how this might factor into someone’s decision to purchase a home.
Let’s start with a walk through U.S. market history.
Market fluctuations are part of a dynamic economy.
Where there are markets, there are fluctuations, otherwise known as volatility. As Benjamin Graham (Warren Buffett’s mentor) used to say, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
Let’s dig into that! As the U.S. economy has grown, the stock market value has increased over time, but not without its ups and downs. No matter how healthy, diverse, and strong an economy is, it’s bound to experience these ups and downs because the prices are based on how two individuals (the buyer and seller) are feeling about the price at any given time. By their very nature (as short-run voting machines), markets don’t go up without any fluctuations. But over the long-run, the value of the components of our economy (large company stock, land, housing, etc.) generally increases over time. Basically, over long periods of time, we’ve seen that markets go up because the economy is growing.
Stock market investors and our in-house financial analysts typically warn “don’t try to time the market,” which we believe is sound advice for homebuyers as well.
But if this is true, why invest in a home at all?
If you focus on buying for the long-term instead of timing the market, you can benefit from the long-term upward trajectory of the U.S. economy, the growth of cities, and the value of the land your home rests on.
To reap the benefits of a growing economy, we encourage buyers to consider three tenets of investment:
- Don’t try to time your purchase decision based on what you think the market is going to do in the short-run.
- Don’t buy and then sell shortly thereafter, as transaction costs will eat up gains (we’ll explore this more in a future blog post!).
- Don’t try to time your sale decision based on what you think the market is going to do in the short-run. By investing in housing in the long-run, you can ride out the short-term emotions of the market.
That’s why, as an organization:
- Landed only operates in markets we believe will be good investments in the long-term. Landed is specifically working in the most expensive, high-growth markets, like the San Francisco Bay Area and Seattle, which have robust and diverse economies that are resilient to ups and downs in the market (in the long-term). See chart below.
- Landed approaches investing over the long-term. Landed makes a commitment to invest for up to 30 years.
- As a result, the things that end up mattering the most over that kind of time frame are job growth, income growth and demographic changes.
This chart shows the average home prices (on a log scale) in areas that Landed currently operates in, including San Francisco, Los Angeles, Denver, and Seattle. The bold blue line is the average U.S. home price over time. The gray sections on the chart represent recessions. While you’ll notice that the recession in 2008 certainly impacted home prices for a few years, property values have recovered across the board.
Instead of trying to time the market, some of the most important questions you can ask are:
How long do I anticipate owning my next home?
If you view your home as a long-term investment, it should not matter as much when you buy. This is because if you’re in the home for at least, say, 10 years, that’s historically been enough time to ride out short-term market dips. Additionally, it’s enough time to justify and smooth out the transaction costs associated with selling your home.
What are the attributes of my home?
At Landed, we do a detailed review of each home our customers are considering. Most older homes have meaningful work that must be done to repair and maintain them. We try to help you understand the costs and risks of buying a specific home. As part of this process, we’ll provide an analysis of the investment risk associated with homes you are considering so that you can make an informed decision.
Which decision is right for my family and me?
While working out your finances is incredibly important, buying a home is also not a purely financial investment for most of our homebuying educators. There are also a lot of important non-financial reasons to consider – like providing stability for a growing family or securing a great school district for little ones. Whether or not those reasons factor into your decision, we believe that homeownership is a good long-term investment.
So, when’s the right time to buy? It all comes down to this: The right time to buy is when you are ready to make a long-term commitment and when you can comfortably afford the ongoing costs of homeownership.
Should you ever have questions, please reach out to our team.