Founder and CEO of Network Capital Funding Corporation writing about trends in the mortgage industry.
We find ourselves at a torrid time in the American real estate market. As inflation continues to decimate the value of every dollar, prospective home buyers face immense pressure to invest in tangible assets. For many, a home is the most sensible shelter for their savings.
Yet home supplies in coveted markets are scarce. Prices are ever-climbing. Competition for homes is relentless.
This is where we currently stand. The question on the minds of homeowners and prospective home buyers is: Where will the market go from here?
Nobody can say for certain. However, select lessons from America’s history provide a blueprint for home buying at this unique historical juncture.
Lesson from the Great Depression: You cannot separate the economy and the housing markets.
The American economy and the American housing market are dominos aligned in the same row. In some instances, the economy is the domino at the front of the row, whereas in other cases (see: subprime mortgages and the Great Recession) the housing market is the first domino in line.
Perhaps no time in American history better exhibits the inextricable link between national economic performance and Americans’ ability to purchase and hold onto homes. As the stock market crashed in 1929, bank runs ensued and mass unemployment followed closely behind. A staggering 273,000 Americans lost their homes in 1932, and even more suffered foreclosure in the following year. Americans simply did not have the wherewithal to keep up with mortgage payments when crushing stagflation hit.
Some things have not changed since the onset of the Depression. Americans today must be cognizant of economic downturns. A contracting economy means jobs lost, wages uncollected and mortgage payments undelivered. Ultimately, this can mean foreclosures.
And yet, even facing economic hardship triggered by the pandemic, America finds itself in the midst of a record home-buying spree. This may suggest that:
- A new segment of Americans (including former apartment-dwelling city residents) are injecting unprecedented capital into newfound housing markets.
- Home buyers see houses as a sound investment, even as many expect the economy to take a turn for the worse.
- The demand for homes in America is far greater than supply, increasing competition for each home.
The Great Depression is a necessary reminder not to purchase homes beyond your means. While many who lost their homes during the Depression were not living lavishly, this is one lesson we must extract from the hardship of the late ’20s and ’30s.
That said, there are notable differences between 1930s America and 2021 America that bode favorably for today’s housing market.
Incentive-laden tax policies enacted since the Depression make it more affordable to purchase a home and make the necessary mortgage payments (see p. 32 of “Homeownership and the American Dream”). Americans today have a variety of investment options to mitigate risk, and federal policy has prevented bank failures of the scale seen during the Great Depression.
Lesson from the GI Bill: Cheap credit can set you up for life.
Warning: If you’ve been savoring your prevailing 3% interest rates, prepare for disappointment by comparison.
Not long after the Allied invasion of Normandy Beach, President Franklin Roosevelt signed the GI Bill, a token of appreciation to a generation of young people who risked their lives at war. Upon returning home, those GIs received — among other benefits — government-backed loans that all but guaranteed homeownership. Banks that saw Uncle Sam as a guarantor were overwhelmingly likely to approve a mortgage application.
With access to such favorable loan conditions, veterans went on to purchase 20% of all homes built after the war. GIs took full advantage of the easy credit that they absolutely earned.
Flash forward to today. While a government-guaranteed loan might sound ideal, you truly cannot complain about today’s prevailing 3% interest rates. For reference, interest rates topped 17% in 1982, and hovered around 10% for significant periods in the 1990s. You’d have to pay 8% for a home loan just two decades ago.
If you are to take one thing away from the GI Bill, it’s this: Take full advantage of favorable credit while it is available. History tells us that a sub-3% rate (which we have seen for most of 2021) is a statistical anomaly.
Based on the frenzy of home buying that we have seen, it seems that many Americans and foreign investors know their history.
The two monumental American events I’ve discussed provide seemingly opposing lessons for today’s prospective home buyer. While the sudden, near-total crash of the Depression-era housing market reminds us of the importance of buying within our means, the GI Bill reinforces the importance of closing on a home while lending terms are favorable. Upon further examination, these lessons can be very much complimentary.
Americans find themselves at a confounding point. While interest rates are favorable, the economy is racked by inflation and general uncertainty. It’s a time reminiscent of both GI Bill-era opportunity and Depression-era anxiety.
Here’s the thing: You can embrace the benefits of comparatively cheap credit while remaining within your means. Make sure you do not miss out on a prime real estate investment while interest rates are favorable, but do not overextend yourself to the point where you cannot make your payments should times get tough.
For sound home buying, you’ve got to look to the past — for better and for worse.