A housing renaissance has begun. This may be hard to believe after the dizzying, six-year-long crash in home sales, construction and house prices. But housing turned the corner last year, and it will take off in 2013.
Driving this optimism is one certainty: Owning a home has never been as attractive. Potential home buyers have a two-step decision process. First, they determine whether they can afford to make a purchase — does their income safely cover their mortgage payment? Then they determine whether owning is a better financial choice than renting — are the costs of owning a home lower than the cost of renting it?
Housing has never been as affordable. House prices were slashed by more than one-third during the housing bust, and mortgage rates have plunged to record lows. The Federal Reserve is focused on keeping mortgage rates exceptionally low in its quest to jump-start housing and the broader economy. The rent-buy decision is also a slam dunk in much of the country. Rents are rising strongly almost everywhere, making owning a home financially compelling, even after accounting for the cost of maintaining and operating a home.
Buying a home wouldn’t make much sense if house prices were likely to decline further; no one wants to catch a falling knife. But it seems increasingly likely that prices will rise. No one should expect the value of their house to appreciate quickly — counting on your home to be a significant part of your retirement saving isn’t a winning strategy — but it is reasonable to expect that prices generally will rise with at least the rate of inflation for some time to come.
Getting a mortgage loan isn’t easy, but it is getting easier. Lenders are increasingly convinced that the housing recovery is for real and that borrowers will pay them back. Lenders have been worried about lawsuits and other regulatory actions prompted by their poor lending decisions during the housing bubble, but these legacy issues are slowly being settled. Lenders still want borrowers to come up with bigger down payments and higher credit scores than government lenders Fannie Mae, Freddie Mac and the Federal Housing Administration require, but they aren’t being nearly as tough on borrowers as they were. The mortgage credit spigot is slowly opening.
Housing is also set to get a big boost from a lot more households. When a household is formed, it, by definition, must live somewhere. Not many households got started during the Great Recession, as 20-somethings couldn’t crack the tough job market and had a hard time striking out on their own. They stayed in school or with their parents. Immigration also tailed off as the bad job market forced some immigrants to go home and dissuaded others from coming here.
More households forming
While the job market still isn’t great, it is much improved, and this is evident in increasing household formations. More people in their 20s are getting jobs and have quickly struck out on their own; staying with Mom and Dad can be wearisome for everyone involved. Since their first place away from home is traditionally an apartment, demand for apartments has soared, and thus the jump in rents. Immigration will be slower to revive, but it, too, will eventually pick up as the job market improves.