Photo depicting the current economic outlook.

July economic outlook: What the housing market can tell us

Quick takeaways

  • The hot housing market may seem unusual, but it’s happened before—often. History can give us some lessons about what to expect in the near term.
  • If you want to buy, you may be paying more than you would have when demand wasn’t so high. The housing supply remains tight, and that will take a while to fix.
  • Delaying a decision with outsize financial impact, even for a few months, may offer benefits. If you can wait, the demand-supply equation may balance out.

There are some wild stories out there about bidding wars and scarce inventory for housing across the country. You may have heard some yourself, or lived them.

What’s happening in housing and home prices offers some insight into what you might expect from the economy over the next couple of months, as well as how that news might affect your own financial choices.

A housing history lesson

Low interest rates, strong demand, widely available credit: We’ve seen the headlines on today’s real estate market before. Every couple of decades, stretching back into the 1800s and through today, there have been peaks and valleys that led to speculation and higher price tags.1 What’s unique now, of course, is COVID-19.

“There’s a cyclicality to the real estate market,” says Heather Winston, assistant director of financial advice and planning at Principal®. “But the pandemic changed everything.”

Think of the recent shift in saving and spending patterns, Winston says. Many of us adjusted our priorities over the last 15 months. We invested in our homes and saved in our entertainment and travel budgets. Even as that trend shifts, it may exert pressure on the housing and supply markets for some time to come: People remain eager to find or improve housing. “It goes back to the basics of supply and demand,” Winston says. “Demand is up and prices are moving up with it.”

The takeaway? Expect continued unpredictability in all things related to housing, from the foam supply for the new couch you’ve been eyeing to the wire needed for an electrical upgrade.

Your wallet: There are lots of debates about whether inflation, including in housing, is transitory or here to stay for a while. Whatever happens, one way to inflation-proof your budget is to pay off any debt with an adjustable interest rate. Doing so helps lessen the negative impact on your finances if the United States Federal Reserve increases rates to help manage inflation.

Housing winners and losers

Economic cycles bring welcome news for some—and less-welcome news for others. The same is true with housing, and that duality is hitting potential buyers hard.

“It’s a great time from an interest rate perspective and a really bad time to be in the market to buy at a reasonable cost,” Winston says.

There are parallels to more recent history that Winston is watching closely. “In the early 2000s, we were in an environment where rates were low and you could buy a property and not overpay,” she says. “Rates are still low, but we’re paying through the teeth for property. There’s a similar dynamic at work—easy loans then, lack of inventory now.”

It’s a great time from an interest rate perspective and a really bad time to be in the market to buy at a reasonable cost.”

Heather Winston, assistant director of financial advice and planning

Is it another housing bubble? It’s hard even for the experts to suss that out. Contradictions abound in the housing data and in other economic indicators. Take job openings: There are roughly the same number of jobs available as there are job seekers,2 but unemployment remains well above pre-pandemic levels.3 Making sense of all the inputs and when “typical” cycles might resume is anyone’s guess.

Your wallet: Try to remove emotion from big financial decisions. That includes anything related to housing, whether you want to remodel, sell and buy something else, or even build new.

“The value of the home you’re interested in may be inflated. Could you wait? Could you sell at an elevated price and rent until the markets recalibrate?” Winston says.

A home purchase is usually the single largest, long-term investment you will make in your lifetime, so the tradeoffs may be worthwhile. Buying something bigger, for example, may offer some benefits. But that should be balanced with the investment of time and money to care for and furnish it, too. Weigh your decisions against the risks, now and in the future.

Searching for unicorns

There are plenty of examples of speculative behavior in today’s economy, from the hot housing market to the latest lumber pricing. People are making bets on what they think might happen—or, as Winston says, “chasing a unicorn.”

“With housing,” says Winston, “that unicorn is a home with all the bells and whistles, a great interest rate, and under budget.”

But unicorns are hard (if not downright impossible) to find. If you feel yourself swept up in economic news, such as a house that everyone wants, remember that there’s been a lot of upheaval in the last year and a half.

“Ask yourself, Am I making the right decision for me, for the people around me, for the life I want to live, for how much I can afford, and for what I value?” Winston says. “Those are the things that you already know.”

Ask yourself, Am I making the right decision for me, for the people around me, for the life I want to live, for how much I can afford, and for what I value?”

Heather Winston

Your wallet: If you’re looking at houses, decide what tradeoffs will help you stay in budget. Does an up-and-coming neighborhood or more DIY projects gain you square footage and enable you to stay in a home longer? “Tradeoffs that seem small initially may have a big long-term impact,” Winston says.

Get the help you need.

1 https://www.businessinsider.com/the-economic-crash-repeated-every-generation-1800-2012-1#the-next-real-estate-cycle-was-1974-to-1992-with-the-second-half-of-the-cycle-being-buoyed-by-credit-creation-and-real-estate-collateral-13

2 https://www.wsj.com/articles/job-openings-are-still-rising-but-labor-demand-is-easing-in-some-sectors-11623144602

3 https://www.bls.gov/news.release/pdf/empsit.pdf

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