I am constantly asked my thoughts on where the market is headed and whether now is a good time to buy. Is the market going to crash? Will the value be there in 5, 10, 20 years?
Questions like these are enormously valuable. Further, they are asked in the context of the most important decisions we can make - those of homeownership.
My answer is always the same, regardless of where the market is. It is always a good time to buy as long as your time horizon - the time between now and when you’d consider selling - is long enough.
Compound Interest
Albert Einstein is (wrongly) attributed with saying, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
For the overwhelming majority of Americans, our homes represent most of our net worth. As one demonstration of this, the National Association of Realtors by way of the Federal Reserve Board’s Survey of Consumer Finances in 2019 noted, “The median value of a primary residence [is] worth about ten times the median value of financial assets held by families.”
Surely in the years between 2019 - 2023 this figure has only increased with how prices in the Boston area have behaved.
Einstein’s quote is instructive because it explains why Americans have so much wealth tied up in their homes and nowhere else.
Americans are bad at saving money and even worse at investing any money that they do save. Because losses, including opportunity costs, compound just as gains do, Americans have little to show for working & saving for a 30+ year time horizon. They thus miss out on having their non-real estate components to their net worth compound over the same horizon. This topic is discussed at length in my recent article, "How the Right Real Estate Agent Can Make You Millions."
By contrast, when one owns a home they are forced to invest monthly by way of paying down their loan, and they experience the beneficial tailwind of appreciation (price increases) for as long as they own the asset (time horizon).
What About ‘08?
When I explain these concepts to my clients, the questions shift from “Is it the right time to buy” to “If we do buy, what happens if the market crashes” with the word “crash” being undefined, but I assume we mean a sudden 10+% drop in price.
Because the good times don’t last forever, we want to be prepared for the worst case scenarios. That said, as long as you can comfortably make your mortgage payments and as long as your time horizon is long enough (meaning you don’t have to sell imminently), then a sudden 10+% drop should mean little other than making you feel very uncomfortable.
While the GFC had many causes, the Royal Bank of Australia notes that, “the catalysts for the GFC were falling US house prices and a rising number of borrowers unable to repay their loans.” Following 2008, US regulators introduced a number of new policies to tighten lending regulations, making for a much more resilient system now.
Most such borrowers defaulting in 2008 were “subprime”, meaning that they had sketchy credit history at best and most importantly, would not pass today’s guidelines for obtaining a loan due to the legislation introduced.
The Boston Real Estate Market
All markets are defined by supply and demand. The Boston real estate market weathered 2008 better than the national average due to its higher demand and lower supply.
Most importantly, the graph suggests that if those who bought at the height of the market in 2006 were to sell today, they would experience an average realized gain of 71%. Time horizon trumps all.
Conclusion
Demand in Boston is generated from readers like you - who want to own and invest in the greater Boston area. Boston is attractive because of its education, job opportunities, and lifestyle attractions. Its supply is constrained by strict regulations in each city around the metro, and literal lack of land by its being located on the coast.
These factors do not mean Boston’s housing market is invincible, but it does suggest strong underlying fundamentals. Having a longer time horizon mitigates the risk that a homeowner will ever realize (as distinguished from experiencing) a large decline in their home value.
Decisions on homeownership are complex and the needs of my clients vary on a case by case basis. While only you can make a decision as important to you as owning a home, walking through your needs with a trusted real estate advisor will add an enormous level of clarity on what is the right course of action for you.
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