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A few months ago, the internet was filling up with predictions that we’d have a 2008-style crash in home prices. The thinking was that the increase in interest rates would cause mortgage payments to skyrocket and price out an entire generation of homebuyers.

Hasn’t happened.

In fact, in some parts of the US, the housing market is as strong as ever. Why is that? Well, what people didn’t consider is that there isn’t a lot of inventory out there, and you have people who are basically price-insensitive buyers—they must buy a house, no matter what. For sure, the prospect of bigger mortgage payments has deterred some buyers at the margin, and that is reflected in the home sales data, but prices simply haven’t come down all that much.

Perhaps a better way of thinking about this is not so much that interest rates went up a lot but that they went up from extremely low levels. The current level of interest rates is actually normal—the low-interest rates we had before were abnormal.

Interest rates rose, there was an adjustment period, and now people have adjusted to the higher level of interest rates. You would have expected prices to adjust much lower to account for the higher interest rates, but that simply hasn’t happened.

Weird, right? This has made a lot of people look foolish with their housing doom predictions.
 

Personal Finance vs. Investment Purposes

For personal finance purposes, I like to tell people that a house is not an investment. A house is a negative carry. You’re paying the mortgage, you’re paying property taxes, you’re paying insurance, and you’re paying for maintenance, which averages around 1% of the value of the home each year. Stocks and bonds are positive carries, like most investments—you earn dividends and interest.

But for some people, a house is the best investment they’ll ever have. The 30-year fixed-rate mortgage is kind of a forced savings program—it forces you to build equity in your house over time. Some people live in the same house for 30 years, have no savings and no investments outside of the home, but find they are living in an $800,000 house that is completely paid off.

It has been said that the 30-year fixed-rate mortgage was the most important financial innovation of the 20^th century. Kind of makes you wonder why Canadians have variable-rate mortgages because they are suffering right now with higher rates. And with the 30-year fixed rate mortgage, you have the option to prepay, so if interest rates come down, you can always refinance and take advantage of them.

Plus, housing prices do go up over time—around 4% annually, keeping up with inflation. That’s not as good as stocks, obviously, but there’s a lot less volatility. That’s one advantage to investing in your own home: You can’t look up the price on your phone every day and be influenced by the volatility. Okay, with Zillow, you can, but I recommend against it. I just looked up the Zestimate for my home, and it’s about where it was six months ago.

Anyway, housing is a great investment because people never look at the price, and they let it compound forever, unlike a stock, where they watch the price every day and get shaken out.

So, for personal finance purposes, a house is not an investment—it physically depreciates and costs you a lot of money. But for investment purposes, it is, as people found out in the last couple of years.
 

What Causes a Crash

The financial crisis was a long time ago now—15 years. Many people have already forgotten about it.

What caused the housing crash was not higher interest rates—it was a credit issue, where banks with extremely loose lending standards were giving mortgages to people who had no hope of paying them back. With the current regulatory structure, that is unlikely to happen again. Talk to some real estate appraisers and ask them how their lives are different in a Dodd-Frank world.

For the old-timers reading this newsletter, you might remember that the housing market didn’t crash even when mortgage rates got up to 14% in the late 1970s. Sure, it was unpleasant, but deals were getting done.

I have heard from a lot of people who told me that their first mortgage had double-digit interest rates. And valuations were low. But as interest rates dropped over the next 30 years, valuations increased.

It really comes down to what you think the path of future interest rates is. Do you think we will have 3% mortgages in the next few years? Do you think they will stay around 6%? Or do you think they will go higher? None of these scenarios will lead to the deflationary depression we had in 2008.

Is now a good time to buy a house? It’s as good a time as any.

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