The New Normal Shall Pass

It is amazing how focusing on a relatively small sample of recent results influences our outlook of what is most likely to happen next.

Going forward, too often we lack the foresight to see some of those pendulums swinging right back to where they were before.

So here we go, every day we wake up and face the future. Who would like to make the case for why “it’s different this time” and why “these are paradigm shifts towards a new normal”?

1)      Interest rates will remain near these historically low levels.

2)      Owning a house is no longer an attractive investment.

3)      Renting a home is cheaper than buying.

Even though recently there have been times where a reasonable person could begin to make a case for any of these, I'll take a stand and argue that each one going forward will be false. They are unsustainable abnormalities in the long run. The new normal that people are afraid of shall pass and in time we’ll arrive back to the old normal.  

Interest rates will rise, maybe soon, maybe in a while. If our Fed wasn’t artificially holding interest rates down, where do you think rates would be today? The eventual rise will be quite noticeable when compared to today’s historically low levels. Think of the stories that will be told of those low-interest days gone by.

There are three stories I would want to avoid having to tell when it comes to rising interest rates; I wouldn’t want to have lost money by investing in bonds when rates went up, have carried variable interest debt too far, or have delayed a planned debt financing (as is the case of a procrastinating first time home buyer or move-up buyer or short-term strategic renter).  

Owning a house has always been and will continue to be the American dream; it’s just a dream that’s responsibly achievable by maybe 60% of the people instead of 67 percent. So the market adjustment takes place and then the supply and demand for shelter takes hold once again and home prices inflate.

According to some observers there may likely be a shortage of new homes within the next year. Home builders are gearing up, the stock market has already bid up the shares of home builders based on their forward prospects, and it was just announced that building permits have hit a three and a half year high.     

What scenario (for a responsible buyer) has renting beating out buying? That’s easy, home prices have to fall sharply and then you have to sell. Housing affordability has not been this attractive for quite some time, while at the same time rent prices are going up because the demand from an increasing pool of renters is bidding up the supply of rental properties. The old normal is on its way back.  

If foresight or fate had you on the sidelines and you missed some (or all) of the recent decline in home values, then congrats on keeping your powder dry. And if you are ready to trade up, then you are fortunate as well. It is a great time to buy.