There is a huge housing crisis today for young families who weren’t able to snag a house years ago and lock in the ultra-low interest rates available back then. Nationally, housing affordability is at its worst level in half a century, which is exceedingly demoralizing and challenging for an entire new generation.
Click here to view the full article.
Click here to view the article on Pimco.
For young frum families, the challenge feels all the more burdensome. Because of our family sizes, KH, and the need to cluster for shuls, schools, and other frum necessities, our housing options are fewer, and the pressure on prices is more extreme.
Many are panicked enough to grab any house at any price, basically. They argue that, even if they can’t afford it now, it will only get much worse down the line! After all, the prices basically doubled over the past couple of years, so it seems like financial suicide not to buy a house, and if need be, you can always just flip it at a much higher price, so the risk is nil. A no-brainer, right?
What do we say to this logic? Should we indeed expect housing prices to spiral rapidly indefinitely? And should young couples just grab whatever house they can find?
First, a Mashal
If I asked you to predict the weight that a particular baby will reach each year of its future life, how would you answer that question in a thoughtful way? In the first year of its life, a baby grows very rapidly, but clearly, it’s not going to continue tripling in size forever. On the other hand, you know that barring some catastrophe, this baby will definitely get much bigger over the years.
You may look at some general statistical data and the baby’s gene pool. But even siblings can have wide disparities in body weights, and there’s definitely no predicting how much pastrami and kishke this baby will consume down the line. Clearly, predicting even this relatively simple matter is quite hard. You know with almost certainty where things are headed, but at the same time, have little specific clarity.
Booms Can’t Last Forever
Similarly, it’s easy to predict that housing prices in frum areas will generally, over the long term, rise considerably. But it’s almost impossible to predict precisely where the numbers will be month by month and year by year. After an extraordinary boom, it may feel like real estate prices will continue flying upward forever. Still, just like human beings’ weights, prices can’t keep quickly doubling and tripling. At some level, even super-desirable real estate becomes beyond reach for most, and prices often slow down, flat-line, or even fall.
Booming Frum Demand
It’s often almost impossible to predict short-term investment pricing because so many variables come into play. Demand for homes is obviously a major driver of pricing. In frum communities, we tend to have large families and cluster together, so it’s easy to predict that long-term demand will, BH, be very strong and prices will rise accordingly. Barring some catastrophe or an unusual behavioral shift, prices in frum areas will be higher in the long run, which is why most frum families should buy homes once they are settled.
Things Do Change
But the specifics, even of frum housing demand, changes. For example, over the past few decades, demand for frum housing in some parts of Brooklyn has eased a bit (not disappeared) from time to time as other areas became relatively more attractive, such as Staten Island and Lakewood.
Today’s Lakewood has characteristics similar to the Brooklyn of 30, 40 years ago, with booming demand driven by the growth of spiritual and material opportunities. It’s anyone’s guess where, and by how much, peak demand will shift to less expensive, less crowded areas.
Big Supply Increases
That leads us to the knotty question of supply. As Lakewood’s surrounding towns became more hospitable for Orthodox Jews, the potential supply of desirable housing increased drastically. And as prices in Lakewood and the immediately adjacent neighborhoods exploded, it became increasingly attractive to leapfrog farther out. Brooklyn never really had this luxury, so it is not a good comparison to today’s magnet areas in Lakewood, Monsey, etc.
This process kicks off a virtuous cycle where the development of Orthodox infrastructure makes the less crowded areas more desirable and a better relative bargain, so demand goes up, bringing in even more infrastructure and home development. At some point, new supply options can take the edge off price increases or even lead to lower prices in the most expensive spots.
Even Out of Town
Similarly, the ever-higher prices and crowding in Greater Lakewood, Monsey, and Brooklyn make it more attractive to settle in certain burgeoning out-of-town communities. Especially in states with tuition vouchers and politicians more welcoming to conservative values, it’s becoming more common for young couples to consider out-of-town a preferred option, not a b’di’eved.
If frum infrastructure grows rapidly elsewhere, a shift in mindset toward community options could significantly alter local supply and demand over time. Lower local demand could then further ease pricing pressures. This hasn’t happened in a huge way in the past but it definitely could.
Communal OOT Focus
As an aside, it requires a much longer conversation, but I think this is one area the community can focus on to help these housing challenges for everyone. Helping bolster the infrastructure and desirability of lower-cost areas can benefit everyone significantly.
National Variables Matter, Too
Beyond our internal factors, significant cost variables affect real estate nationwide. Escalating construction costs have been a major factor driving housing prices higher across the US, though not at the same rate. Where are prices for lumber and cement headed down the road? And how about the availability of excavators, carpenters, plumbers, electricians, HVAC technicians, etc.? I don’t think anybody knows the precise answer to these questions, though some pundits will express their opinions with great confidence.
Interest Rates
There’s also always tremendous uncertainty about interest rates. Because real estate is so heavily dependent on mortgages, the price of homes is closely tied to the cost of borrowing money. When rates were rock-bottom, people of modest means were able to swing even more expensive homes, pushing prices up. This trend has reversed strongly now. Consider what happens when the possibility facing a young couple switches from buying a townhouse for $600,000 at 3% to buying the same townhouse for double the price AND double the rate.
At some point, the monthly payments become too prohibitive, and many buyers are now priced out. So, prices typically ease or even fall.
Where are interest rates headed? Will the government bureaucracy decide at some point to lower rates significantly to help ease national housing challenges? How high/low will they go and for how long? Well, I doubt we will see the same rock bottom rates again. But, nobody knows for certain how this most fundamental metric will play out.
Navigating Uncertainty
If you were hoping for a black-and-white answer, I’m sorry to have disappointed you. The real world is far grayer than most people recognize. It’s tough to predict, especially about the future, which is why making decisions about real estate, or any investment for that matter, is never cut and dry.
If you have some clarity on what you need and can afford mortgage-wise, you should probably buy a house ASAP. Even if there’s a slight chance you may come out ahead by waiting a bit, there’s a greater chance that you will end up priced out of the market, a much worse proposition. I’ve made it clear, and reiterate here, that most young frum families should definitely buy homes to settle into once they have a bit of marital stability and financial clarity.
Without Panic
On the other hand, I’m quite skeptical about newlyweds panicking and grabbing any house at any price, in any neighborhood, even though they are not really ready for this major financial step.
Unless you have your heart set on a specific area, which may indeed become unaffordable, it’s almost certain that new frum neighborhoods with reasonable pricing and infrastructure will open up down the line.
I can hear the argument that it’s worthwhile to buy a house, any house, and rent it out to hedge your bets, but recognize that while you may come out ahead with this strategy, you may come out behind too, especially if you stretch well beyond your current financial abilities.
I will elaborate on the potential downsides of newlyweds buying homes in a further article. But, either way, panic is never a good thing.
Want to dig deeper?
Try these related articles
Home Buying: Is Waiting for a Better Price Smart?