Real Estate

Rethinking the American Dream: 6 Considerations for Buying a Home in This Economy

Man holding up a model of a home on a tray
Credit: Shutterstock

By Tammy Trenta, MBA, CFP, CTC, CEXP; Founder and CEO - Family Financial

Understanding how inflation works, and looking at historical investment returns challenges the idea that paying off a mortgage is the pinnacle of saving for retirement

We’re living in the era of The Raised Eyebrow - and not because of Botox. Many people are raising them in horror as the meter ticks rapidly upon filling the gas tank. Others are raising them in shock at the grocery store checkout line. The lucky are raising them in pure glee - like the teenage babysitter commanding $30 an hour, or the corporate executive sifting through dream offers from desperate recruiters. And nowhere are eyebrows raised higher than in today’s real estate market, where costs are up 28% from 2020. 

Navigating the financial impact of this “new era” can be confusing. Long gone are the days of comforting predictability, when a person could expect to begin a career with a company and retire with that same company. Or a young, newly-married couple could expect to buy a home for $10,000 and live there until death do they part. Today, job-hopping and frequent moves are commonplace. Adding global pandemics and crushing inflation to the mix turns this new-era confusion into mind-boggling chaos. But if you’re in a place where you’re considering homeownership - arguably one of the biggest investment decisions of your life - it’s important to calm the chaos by understanding how inflation works, and what your options really are.

How inflation works

Inflation measures the rate of the rising price of goods and services. Historically, prices have inflated about 2-3% per year - meaning consumers could anticipate about 2-3% less bang for the buck. In times of high demand and low supply, prices can inflate more rapidly. And this is where we’ve been since the pandemic.

One of the jobs of the Federal Reserve is to keep inflation in check by setting a baseline for interest rates. In times of high inflation, the Federal Reserve will increase interest rates to make credit more expensive, thus curbing demand and stabilizing the price of goods and services.

The steep inflation that followed the pandemic resulted from a perfect storm: Interest rates were lowered to encourage consumers to spend more to keep the economy afloat. Meanwhile, a significant amount of financial aid was provided to help families and businesses weather the storm. Together, this resulted in an unprecedented spending spree. But then economic shutdowns and labor shortages left suppliers unable to quench consumer demand - further driving prices, and eyebrows, up.

And nowhere are eyebrows raised higher than in today’s housing market, where homes are up a whopping 40% in some areas.

How inflation affects housing prices

The housing market faced its own perfect storm born of similar circumstances. After the last housing bubble burst in 2008, builders became more conservative in what, when, and how they chose to build; this (and many other factors) led us to today’s tight housing inventory. Between stimulus money, lower interest rates, and higher wages introduced during the pandemic, home buyers found they could afford more. Low rates, extra cash and the short housing supply led to bidding wars fueled by FOMO - which drove up housing prices to today’s record levels.

But we knew it couldn’t last forever.

Interest rates are now rising (up by 2.25% so far in 2022), which is having its intended effect of cooling down the housing market. This rise in rates increased the average mortgage payment by approximately 50%, which is pricing many buyers out of the market. For example, last year, a $400,000 mortgage would have cost around $1,577 each month. Today, that same loan would cost $2,285.

Now, homes are sitting for a longer period of time, and in some areas, prices are even starting to dip. Unfortunately, no one can say for certain how far they will dip, or when. And the Federal Reserve is hinting at raising rates another 2% before the end of the year.

Owning your reasons for homeownership

Buyers often point to the optimistic misconception that home prices “always” grow faster than inflation - or that a paid-off mortgage is its own reward. But returns are far less reliable for today’s buyer, who sells their home an average of only 8 years after purchase. 

Even if, by some special grace, a home bought today outpaces inflation 8 years from now, there is a good chance that purchase will come with a heavy opportunity cost. Most buyers put down a substantial piece of their savings to purchase a home in the hopes it will be worth a lot more by the time they sell. If interest rates rise as they are expected to, it could instead mean eroded or even negative equity for 8 years, when that money could have been growing in the stock market all along. 

Of course, financial security is not always the primary motivation for homeownership. I can relate to those who say it’s about creating traditions and establishing roots in a community - I felt the same when my children were little. But it would have given me pause if someone said, “Tammy, I looked at the numbers. Buying a home instead of renting is actually going to cost you twice as much in the long run.”

For those who view homeownership as an investment decision only, and want to buy today, my advice is to take a pause(To be clear, I’m talking about buying a house for yourself - not an investment property. Which is a whole other article). The U.S. Home Price Index is a great chart that illuminates the possibility - or probability - that buying a home will end up being a precarious financial decision. But if you must, proceed with abundant caution by looking carefully at the numbers - specifically your particular market with an independent advisor. Ask yourself the following six questions:

  1. Am I using a substantial amount of my overall savings as a downpayment?
  2. Realistically, what is the shortest amount of time I’ll live here?
  3. What would happen to my savings over the same time period I invested it in the stock market instead?
  4. What am I paying monthly to own? (Mortgage, taxes and insurance)
  5. What would I pay monthly for a comparable rental property?
  6. What tax benefits can I realistically expect? (Hint: Don’t assume home ownership comes with huge tax benefits. Remember - times have changed!)

If the numbers above shake out in your favor, or if you’ve accepted that they don’t, but want to buy for personal reasons, Godspeed. My money is on higher interest rates - and eyebrows - in the months to come.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Tammy Trenta

Tammy Trenta, MBA, CFP, EA, CTP, is the Founder & CEO of Family Financial, a wealth management firm based in Los Angeles, CA. With 25 years of industry experience, Trenta believes in a holistic, 360 degree approach to wealth and financial management, integrating financial, tax, and legal guidance to help clients accelerate their wealth and keep more of what they earn. Family Financial (FF Advisors, LLC dba Family Financial) is a registered investment advisor.

Read Tammy's Bio