Should You Buy A House Right Now?

WORCESTER, ENGLAND - DECEMBER 27: The Rose and Crown public house suffers flooding in the village of Severn Stoke near Worcester on December 27, 2012 in Worcester, England.

Photo by Christopher Furlong/Getty Images

I’m closing on a new house for myself and my wife on Monday, and when I mentioned that on Twitter some people asked me for my perspective on whether buying makes sense right now.

Obviously in many ways it depends on the details of your personal situation, but I think the basic case is simply that right now if you qualify for a standard mortgage you can get money for cheap. The average interest rate on a 30-year fixed rate mortgage is down to 3.35 percent. I got a slightly better rate than that. It would be extraordinary if aggregate nominal income in the United States doesn’t grow that fast over the next thirty years, so on average people who borrow money to buy land are going to make a profit. Now that said, it’s important to note that homeownership in the sense of “buying a house for you to live in with your family” remains a questionable investment strategy. In the abstract it’d be better to borrow money at 3.35 percent and buy land in a city you don’t live in to diversify your exposure to idiosyncratic shocks to particular metropolitan economies. Even better would be to borrow money at 3.35 percent and buy a small share in a diversified land trust of some kind that owns parcels scattered across the country. Or you might just want to buy an S&P 500 index fund.

The investment case is that if you qualify for a cheap loan, you ought to seize the opportunity. Homeownership comes into play because buying an owner-occupied house is the main way a typical American person can actually obtain a cheap loan. That reflects some questionable public policy ideas deeply ingrained in American political economy.

So the question facing any individual is the conflict between the fact that right now is a great time to borrow money and buy long-term assets and the fact that the primary thing you might be able to buy that way is a house inconveniently located in the very city where you live.