Homebuyers’ confidence on the rise as some anticipate correction on overheated prices

Homebuyer sentiment has always been a very interesting, dynamic and often unpredictable factor in the housing market. Take home prices, for example. According to the recently released S&P/Case-Shiller U.S National Home Price Index, home prices in December 2016 continued a record-breaking streak, having risen to a 30-month high. Previous all-time highs were smashed in seven major cities, including Boston, Charlotte, Dallas, Denver, Portland, San Francisco and Seattle. By all account, inventory has been tight, and there is the looming threat of imminent interest rate hikes. You would think homebuyers would be deterred; some might even throw in their towels and decide to stay life-long renters.

However, homebuyer psychology is a funny thing. Along with news of hot, hot home prices, there has also been a steady supply of headline on the inevitable price correction and a housing bubble. Many experts believe home prices are not in line with wage growths, and therefore not sustainable. It appears that some homebuyers have chosen to believe the bubble narrative. Instead of losing confidence in the face of rising home prices, many have shown increased confidence in their ability to buy with the anticipation of a pending correction.

In the latest ValueInsured quarterly Modern Homebuyer Survey, conducted in January 2017, more prospective first-time homebuyers are confident they can afford the down payment to buy a new home. This increase coincides with a rising confidence that home prices are headed for a bubble, and are not sustainable:

  • Among current renters who are highly interested in buying their first home, 55% believe home prices in their area are too high and not sustainable; this is a +9 percentage point increase since September 2016
  • Among these same prospective homebuyers, 39% expect a “pricing bubble and correction” in their area in the next two years; this is a +8 percentage point increase since September 2016
  • More of these prospective homebuyers have increased their confidence in their ability to afford a down payment in the same period, from 45% to 48% (+3)
  • More of these prospective homebuyers have increased their confidence that buying a home will be a good investment, from 58% to 63% (+5)
  • More of these prospective homebuyers have increased their confidence that buying a home will be the best investment they can make for themselves and their family, from 64% to 69% (+5)

Another interesting aspect about this homebuyer’s line of thinking is that if homebuyers are excited about potentially correcting home prices, are they simultaneously concerned about falling values of their home after they buy?

ValueInsured’s survey found that 65% of prospective homebuyers believe home prices in their area will be higher in a 5-year horizon. But how about the other 35% who believe prices could be lower in 5 years? And among the 55% who believe prices are now too high and a correction is looming, what do they think will happen if they buy now and have to sell before the 5-year mark? After all, according to the latest U.S. Census data, the average Millennial’s job tenure is 2.8 years. In this highly mobile job market, having to move within 5 years is hardly an outlier scenario.

According to Joe Melendez, CEO of ValueInsured, one common tendency among first-time homebuyers is they only focus on their immediate housing needs, and today’s home prices, when in fact, Melendez advises, all homebuyers should always buy with an exit plan in mind. In other words, they should buy not only based on what they can afford today, and what their housing needs are today, but also when they may need to one day sell this home, and what they could be able to sell it for.