I’ve Watched Real Estate for Decades: Here’s Why You Should Have Hope

If you're young and want to buy your first home, the current trends aren’t your friend. That's because homebuying is becoming an activity for middle-aged people. Half of first-time home buyers this year are 40 or older, according to the National Association of Realtors (NAR). That's up from nine years ago, when the New York Fed found the average age of first-time home buyers was 35.4 years.

Homebuyers' ages have been creeping steadily upward in the decade since. But trends eventually fizzle out. When this one does, people will be able to afford homes before they need to wear reading glasses to sign the mortgage paperwork.

Why talk about this now? I'm retiring after almost 25 years of writing about mortgages and real estate; this is my last column. For young people who feel discouraged but aspire to own a home, I want to put today’s unfriendly housing market in perspective. Believe it or not, there are ways the market might improve, and reasons for optimism.

Houses have been unaffordable before

Today's affordability crisis is the third I've seen. The previous two crises ended. So will this one.

The first affordability crisis I witnessed began in the late 1970s and crested in the early 1980s. As the oldest baby boomers turned 30 in 1976, demand for houses surged. Home sales skyrocketed. Home prices rose dramatically each year from 1977 to 1980, according to historical data from NAR.

Meanwhile, mortgage rates went haywire. Interest rates on 30-year home loans climbed above 10% in late 1978 and remained in the double digits through most of the 1980s. In 1981, the 30-year mortgage rate peaked at 18.63%, according to Freddie Mac.

The next affordability crisis happened in the early to mid 2000s, when Gen Xers were in their 30s to early 40s. They, too, wanted to own homes. More than 7 million existing homes were sold in 2005, and the median home price rose 12.4% that year — its first time exceeding $200,000.

Rates on 30-year mortgages were stuck above 6% during most of the 2000s, and lenders created mortgage products that gave the illusion that homes were affordable. Lenders marketed mortgages for borrowers with bad credit, interest-only loans without principal payments, and mortgages that didn't require borrowers to prove their income.

Many of these loans were adjustable-rate mortgages that started out with extremely low interest rates. These loans seemed affordable until the first adjustment. When that first adjustment arrived and their interest rates jumped, many borrowers discovered their payments weren’t realistic after all.

The real estate boom went kablooey when millions of homeowners lost their homes to foreclosure. Home sales plunged. The financial system almost collapsed, leading to the Great Recession.

The cycle of unaffordability comes around again

The unaffordability crises of the early 1980s and the early-to-mid 2000s happened about 20 to 25 years apart. And now, 20 years after the most recent affordability crisis, the next generation is struggling to find homes they can afford. Again.

I'm bringing up this history to point out that we regularly go through periods when homes aren’t very affordable. Those periods end. This one will, too. And I’m hopeful things won’t get as messy as in the 1980s, with those 18% mortgage rates, or in the 2000s, with the Great Recession and all those foreclosures.

How homes will become a little more affordable

Affordability will improve as multiple factors converge: The number of homes on the market is rising, home prices and rents are leveling out, and mortgage rates are likely to stay steady or drop a bit.

Rates on 30-year fixed-rate mortgages have been remarkably stable since September: They've stayed mostly between 6.25% and 6.5%, according to Freddie Mac. The Mortgage Bankers Association and Fannie Mae both predict that rates will remain under 6.5% in 2026.

While mortgage rates are settling down, prices are stabilizing in many markets. That's because more homes are for sale, and more home buyers are negotiating from a position of strength. In November, the typical price rose 1.2% compared to a year earlier — slower than the overall inflation rate.

Tie all these real estate trends together, and you end up with a housing market where homes will gradually become more affordable over time. Yet probably not as rapidly as you would like.

…but affordability isn't the whole picture

When I asked my colleagues what they're anxious about when it comes to homeownership, their questions boiled down to this: "How can young people find homes they can afford to buy, insure and maintain — while also having nearby amenities such as hub airports and plenty of things to do?"

It's a tough question to answer, because I'm tempted to fall back on my personal experience. And my experience is different from most people's, because I moved five times in my 20s and 30s, always to cities where I didn't know anyone. So my response might come across as heartless: Move to where homes are affordable.

If you're willing and able to move, I suggest Midwestern cities that have relatively lower-priced houses. Most Midwestern cities aren't vulnerable to rising seas, hurricanes or wildfires, so home insurance isn't exorbitant. A lot of these cities, especially college towns, have lots of stuff to do — I'm talking places like Columbus, Ohio; Madison, Wisconsin; and Pittsburgh.

Where does that leave folks with unbreakable ties to expensive cities? Before giving up on your homeownership dream, you should talk to real estate agents and mortgage loan officers. Chuck Vander Stelt, a real estate broker in Valparaiso, Indiana, said these experts "can tell you what you can do, or what you need to do, so you can do what you want to do."

You might find that you're eligible for low down payment (or even zero down payment). You might qualify for a first-time home buyer grant, or builders could be offering incentives on new homes. You might get advice on how to build your credit so you can qualify for a mortgage, or get a better rate. You won't know until you ask.

And if the experts tell you that homeownership isn't in the cards anytime soon, you can accept that you'll continue renting. Sometimes that's the price of living in a vibrant place near family and friends.

But if you hope for another housing bubble to pop, I have bad news: I don't think we're in a bubble, and we won't see a steep slide in house prices like we saw from 2006 through 2011.