Stay Out of the Red Hot Housing Market!

Everyone I talk to seems to be obsessed with today's hot housing market. With prices skyrocketing and inventory at ridiculous lows, the market shows no sign of cooling down. A Business Insider headline advises potential homebuyers to "wait until 2022 to buy a house." According to the National Association of Realtors, the median home price in the US jumped 24% since last May (if you live in Southern California, you don't even want to know what that relatively modest median is!), and most homes are selling well above their list price. A recent LA Times story highlighted the sale of a home in Costa Mesa with 54 showings in a single day, ultimately selling for $1.375 million, a whopping $376,000 over the listed price. It's crazy out there! 

Why the frenzy now? The reasons are many. First, Americans saved a bundle during the pandemic, which boosted buying power for many. Second, there is a shortage of homes caused by a pullback by contractors after the housing crash in 2008 that created a deficit of up to a million units. Lumber price increases add to the supply chain disruption. The result: everyone seems to want a house… and they want one now! The situation has people of every age scrambling.

After her daughter divorced and found herself raising three kids on her own, Christina decided to sell her vacation home on Catalina and use the proceeds to buy a 'forever home' for her grandchildren. The hot housing market accelerated her plan, and she sold the Catalina property last month for almost $100,000 over the asking price thanks to a brokers' bidding war. But in this seller's market, the houses that would work for her daughter's family are already out of range. 

Julie and Tim are expecting their first child, and the condo they've shared for a decade is too small for three. They, too, took advantage of the current market to get a great price for their existing property. But now comes the decision: should they buy into a bubble or "wait until 2022"? 

Kerry, at 27, wants to be financially savvy and buy something before she is "priced out of the market." Her idea is to buy a condo now, build up equity, and have the resources to buy a single-family home in the area by the time she's in her mid-30s. After making a handful of offers—and being dramatically outbid every time—she feels like she's already missed her chance at a starter home. Should she pay more for something she can't really afford, leave the area, or delay her plan? 

These decisions aren't easy. (If only I had a crystal ball to tell you when this bubble will burst—or if it is a bubble at all!) The key is to stay cool and make the best decision for you, regardless of what's happening in the market. Here are five tips to help:

  1. Cut yourself off from the religion of homeownership.  
    Owning a home has been the American dream for generations. That doesn't mean it should be your dream. Ramit Sethi, advisor, entrepreneur, and author of the best-selling book I Will Teach You to Be Rich, is a finance guru to 20 to 40-year-olds. He chooses to rent over owning. Why? Because he knows he can make more in the market than he can in real estate. (Yes, that's true even here in Southern California!) Plus, in his words, "if I need to change a lightbulb, all I have to do is call the super!"
  2. Examine your intention for buying.
    I tell my clients there are only two reasons to buy a home: personal enjoyment and a hedge against inflation. Financially, it takes about 7 years to begin to break even after acquisition and transaction costs—and that assumes you don't throw $25k at a bathroom remodel or replace a cracked driveway with pavers! If you plan to stay in a home that long or longer, you can get an edge over inflation. Otherwise, take time to consider how much enjoyment owning your home will bring, and then decide if that pleasure truly outweighs the cost to own.
  3. Recognize that your home is an expense—not an investment.
    For most people, housing is the most significant expense in life. It is NOT (I want to shout this from the rooftops!) an investment. If you're going to invest in real estate, consider buying an apartment building or owning shares in a REIT. When it comes to your own home, once your mortgage, property taxes, and maintenance costs are added to the equation (read about the 1% rule in There's no such thing as an unexpected expense!), renting is often considerably cheaper than owning. 
  4. Know that selling to downsize may not be an option.
    The idea of 'downsizing' is rarely feasible. That's particularly true in Southern California, where prices are always high, and it is certainly true in today's housing market. Unless you are selling a mansion and are willing to move into a considerably smaller home or relocate, finding something that reduces your housing budget by a substantial amount is unlikely.
  5. If you need more time, take more time!
     I can't think of a single reason to rush into a home purchase—especially in a market that is pushing prices well beyond what is affordable. Just like the stock market, the last thing you want is to be forced to 'buy high.' If you already own a home, now may be the time to stay put. If you don't own, don't let FOMO (the fear of missing out) push you to overextend and overpay for a home you can't afford.

Does that mean no one should consider buying a home at the moment? Not at all. Three years from now, we will all know what we would've, should've, and could've done today. Prices may continue to soar and buyers may see a financial benefit. But there's little reason to take that risk. My advice: stay out of the heat! Let the red-hot market play itself out and buy when—and if—the time is right for you.

Related: To Buy or Not to Buy in a Hot Housing Market