Can Lower Interest Rates Solve The Housing Crisis?

Real quick, before we dive into the latest on housing. With some only slightly good news. 

Late last week in The Juice, we outlined our long-term investing strategy. 

Summary: We remain freaking bullish as hell. 

Quick focus just to show how this game works. Like clockwork. 

Over the last five days, as of Friday’s close, Nvidia (NVDA) is up 13.45%, or $14.12. This is compared to relatively meager increases of 3.2% and 4.9% in SPY and QQQ. 

On August 29, after NVDA’s earnings report that tanked the stock, we said to use any weakness to buy Nvidia stock. At the time, NVDA was in the doldrums trading for around $117.50. It proceeded to flirt with $102. Now, as of the end of last week, NVDA trades for just over $119. 

What did we tell you? 

Keep buying NVDA. We don’t think you’ll regret it. 

We don’t have so much confidence about buying a house, particularly if you’re a first-time buyer who is not made of money. We think a house purchase in this environment could end in regret. Especially if you compare it to putting the money you use to financially stretch into a mortgage into the stock market.

The Fed is expected to lower interest rates on Wednesday. 

For a few weeks now, mortgage interest rates have started to come in anticipation of this move. As of the end of business Friday, the rate on the 30-year was 6.14%. That’s down from around 7.0% at the end of June/the beginning of July. 

Mortgage rates might or might not drop further on the Fed’s Wednesday move. We’ll see how much is already priced in. That said, as the Fed makes more cuts, expect rates to continue to fall. How far? Nobody knows. But The Juice would not be shocked to see 5.0% in the not-so-distant future. 

Using some data, courtesy of one of our financial media partners — Bill McBride’s Calculated Risk blog — let’s run some scenarios at different rates alongside our thoughts and analysis. 

As we speak, the median price of a home in the United States is $433,229.

Now, depending on where you live, there’s a good chance you can’t tough a damn thing for less than half a million. But let’s humor one another and use the $433,229 figure. 

Here’s your monthly payment, after 20% down, inclusive of taxes and insurance, at 30-year mortgage interest rates of 7%, 6% and 5% alongside the monthly income required to spend no more than 30% of your earnings on housing. 

At 7%, you need to earn $115,320 annually. 

At 6%, you need to earn $106,200 annually. 

At 5%, you need to earn $97,524 annually. 

So, for all intents and purposes, you need a six-figure income, not to mention a down payment of nearly $87,000, to be able to afford the typical home in the United States of America. 

We said slightly good news at the outset because, maybe, that’s good news to you. 

But, by and large, we don’t think it’s good news for several practical reasons: 

• You could invest that $87,000 you saved in stocks.
• You could invest some of it and put, say, $30,000 in a savings account with the best interest rate you can find and call it a six-month emergency fund. 
• You could not face the pressure of having to maintain that six-figure income, as an individual or household, for the next 30 years. 

Of course, we’re generalizing here. Your current situation greatly influences all of this. That said, if you’re in any type of position of strength housing-wise (free and clear, in a low-rate mortgage, a great renting situation) and can (reasonably and comfortably) live with what you have, seriously consider putting that money in the stock market after you have paid down debt and established an emergency fund. 

Remember: a mortgage is debt. And, while it’s not always “bad” debt, it can be, particularly if the alternative is using your cash to get wealthy in stocks without stretching your budget in the name of home ownership at all costs. 

It’s also more than worth mentioning that if we up the number on the cost of the home — to, say, a more realistic $750,000 — the numbers go even higher into the stratosphere. 

Not to mention the $150,000 down payment you’d likely need to land a mortgage on a $750,000 house. 

If these numbers represent the alternative to being a nation of renters going forward, we’ll happily be one of those renters going forward. 

The Bottom Line: Times are changing. Home ownership isn’t what it once was. And it’s certainly not as easy to get into as it once was. Add to this something we didn’t mention this time. As rates come down, expect buyers to come off of the sideline. Big time. They’re going to help send prices through the roof … again. 

The Juice understands. Supply will increase as people move to sell their homes amid lower rates. But many of these people will be looking to buy another home and they’ll be on the hunt loaded with a ton of cash to spend. 

Not a pretty picture if you’d have to crunch the numbers to afford a mortgage. Like we said, you’re probably better off in the stock market.

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