There’s an interesting new phenomena brewing where people enticed by low rates and home prices well off their recent highs are “doubling down” on housing, essentially betting the house if you will, on more house.  This new group of people was profiled in the recently where some intriguing examples were culled out.

  • Some intrepid homeowners are intentionally taking a loss on their current house—and writing a big check to retire their old mortgage—in order to buy twice the home for not much more money.”
  • “We don’t want to wait for the market to come back,” says Mr. Ayler, general counsel for an energy company. “We wanted a better quality of life now.”
  • “If you are trading up, what better time than when interest rates are at record lows and the cost of the trade-up is much less than it used to be?”

And therein lies the rub.  If you wait for the all-clear, well, you’ve missed the boat.  Everyone else will have begun piling in and driving up the price of housing.  There are some economists that are actually projecting a housing shortage in the coming years due to the lack of new home building we’ve seen for some years now.  They posit that once the economy recovers and Americans repair their credit, they’ll be entering the home ownership ranks again and there won’t be ample supply to match the demand, which will drive up home prices again – but this time due to natural market conditions, as opposed to lax lending standards and monetization of mortgage backed securities.  Conversely, other economists are predicting years of high unemployment, continuing tough credit conditions and a lack of demand for housing as people burned by the market this decade throw in the towel and remain renters for years to come.  It’s tough to predict which outcome we’re looking at, so given the substantial portion of total net assets (or debt) that a mortgage/home comprises, I’d be remiss to speculate with my finances on residential housing.  Call me old-fashioned.

Betting the House?

Some people are using equity from their current residence to invest in new residential or commercial properties.  They are probably right in that rates will likely not be much lower than they are now, yet highly likely to be higher in the future.  However, one part of the equation people often overlook is – great, you got a nice low rate today. Well, what do you think happens to housing prices when rates spike?  That DECREASE in buying power lowers home prices due to the cash available for prospective buyers.  So, it’s a double edged-sword.  If you think rates will remain low for years, then there’s no reason to rush in.  If you think they’ll spike due to inflation, then the equity in your home has a good chance of dropping.

Personally, we’re thinking of trading up – but not as an investment in real estate.  We want to move to a better school district and it’s simply more expensive to live there.  Since that will hopefully be the house we retire in, whether it goes up or down in value is not as important to us, so the low rates and home prices off their highs is appealling.  But, I’m not so naive to believe that a year from now, that new home purchase may not have lost another 10% of its value or more.  Since we anticipate living in it, it’s of no consequence.  If I were a flipper, I’d have second thoughts.

Would You Double Down on Housing Now?