Right now might be the worst time we’ve ever seen for US housing affordability. But it also might be the best time to buy a house we’ll see in a while.

How can both be true at once? Let’s break it down.

The Worst Time

Let’s start with why it’s the worst time. On this point, I feel like you won’t need much convincing. The data backs up what you’re feeling out there. Every measure of housing affordability is at all-time record lows. Here’s Goldman Sachs’ affordability index:

When you combine home prices, mortgage rates, and income levels, October 2023 was the worst month for housing affordability the US has seen in the last century.

Brutal.

The Best Time

The best time to buy a house was five years ago. But the best time to buy a house is always five years ago. So right now is the best time for you, five years from now, to buy a house.

But in all seriousness, if you’re at a point in your life where homeownership makes sense (which you can read about here) and if you can afford it without stretching your budget, I’d give strong consideration to being in the market right now.

Here’s why.

We’re in a housing market where the biggest driver of unaffordability is a lack of supply. We simply didn’t build enough homes after the 2008 housing market crash, and we don’t have the capacity to build them fast enough to keep up with demand.

And there’s a lot of demand out there for homes. The largest generation in US history, Millennials, are now becoming prime home-buying age. Only about 40% of Millennials own homes today, and the other 60% are coming right behind them. There is a lot of pent up housing demand out there. (You can read more about all of this here and here).

Right now, that “pent up housing demand” looks a lot like wishful thinking. What’s keeping a lot of buyers on the sidelines is interest rates. Mortgage rates are up 2.5x in the last year or so.

So the temptation for prospective home-buyers is to say, well, I’ll just wait until interest rates come down a bit, because then housing will be more affordable, and then I’ll start looking.

This is an understandable response, but it’s wrong.

First off, you can’t predict when interests will come down. Secondly, if they do come down, then everyone else who’s been sitting on the sidelines is going to flood back into the market. Remember - US housing is in a supply constrained environment, so that wave of demand is going to run up against limited supply of homes and cause home prices to pop again.

I know, I know. It’s hard to believe after home values shot up nearly 50% in the last couple of years. But the inventory situation is still really bad.

Now you might say, well, if interest rates do come down, it’ll be because the markets and the Fed see the economy softening, which might be a prelude to a recession. In a recession, people lose jobs and incomes, so we’ll see some housing inventory hit the market and home prices will go down.

I have some very bad news for you. Home prices actually increased in 7 of the last 9 recessions. Check out this chart from Ben Carlson of Ritholtz Wealth Management:

That obviously was not the case in 2007-2009, but in that case housing caused the recession, not the other way around. Given the supply-demand imbalance in housing, and the lack of exotic credit products that enabled people to buy homes they couldn’t afford, it’s very unlikely we’ll see that happen this time around.

Warren Buffet, the famed value investor, has a quote about investing that says it’s wise “to be fearful when others are greedy and to be greedy only when others are fearful.” Everyone always seems to interpret “others are fearful” as synonymous with an obvious environment of low prices. But maybe that’s not the case. Maybe this is what it looks like when “others are fearful”.

Mortgage rates in the last week or so have dropped by the largest amount since they started rising over a year ago. Home prices are flat and will likely stay there for the winter. I hate to say it, but the worst moment in US housing affordability ever might be your best bet at a buying opportunity.

And in any case, there’s no time like the present.