Agents across the U.S. are hearing the same question from buyers: 

Am I overpaying on this home purchase?

George Ratiu, the Chief Economist for Keeping Current Matters (KCM), says, “No.”

Last week, he joined Byron Lazine, Tom Toole, and Lisa Chinatti on the Knowledge Brokers Podcast to share three reasons why buyers aren’t overpaying—even in markets that are seeing multiple offers and over-asking bids. 

Today’s home buyers are faced with mortgage rates hovering around 7% along with still-high home prices across the country. Inventory is low, ramping up competition for well-priced homes and, consequently, driving home sale prices up even more, with many selling over the final list price.

So, how can agents answer this question? George approaches it from multiple angles, giving a three-part answer that you can use with buyers this weekend. 

Prepare to take some notes. 

Consumers are asking, “Am I overpaying on this home purchase?”

Byron kicked things off by presenting the question and asking what advice knowledge brokers should be delivering to buyers who have that fear. 

George’s three-part answer included two conditionals and wrapped up with a clarifying observation on today’s market. 

#1 — It depends on your baseline.

The first conditional is based on the consumer’s baseline—meaning what home values or market conditions they have in mind as the standard against which they’re comparing today’s home prices. 

Whenever you say, ‘Am I overpaying–or am I paying more than this is worth?’ you’ve got to have a baseline. So, what is your baseline? And I think for most people, naturally, the baseline is 2008 or, I should say, 2006–2010…the first time we experienced collectively as a country a huge decline in both transactions and prices, and that’s not that far in the past. And so, naturally, they’ll refer to that period when saying, ‘Am I paying today like people paid in ‘05-’06’, only to end up with a house that’s devalued?’ And, in terms of market fundamentals, we’re not in the same boat.

George Ratiu

KCM Chief Economist

From there, he explains the crucial difference between the housing market of ‘05/’06 with the one we have today. From 2003 through 2006, there was a “tremendous amount of overbuilding,” coupled with mortgage loans given out to just about anyone. Now, mortgage loan conditions are much tighter and FICO scores are at a record high. 

Overbuilding in the mid-aughts would have driven home prices down, whereas, in 2023, we’re dealing with near-record lows in inventory, which, combined with pent-up buyer demand, is driving prices up. 

It helps, though, that mortgage lenders aren’t rubber-stamping every mortgage application that lands on their desks. Not only does that put some limits on buyer activity, but it also sets up qualifying buyers for a better homebuying and homeownership experience. 

#2 — It depends on your time horizon. 

Next up with the issue of time, which is closely linked to the baseline but is independent from the mind of the consumer. 

The big question is ‘Over what time horizon?’ Because that’s important, right? If you bought in 2000, and you had to sell in 2007/2008, it’s very likely you still had some real equity. Now, I remember shopping for a house in those years, and I looked at homes that owners bought in 2005/2007 and were trying to sell them in 2010. They took a huge, huge loss on that. That’s why I think time horizon matters. 

And for buyers…this is something important to get clarity on. ‘How long do you expect to live in your house?

George Ratiu

KCM Chief Economist

If your client tells you they expect to live in the house for the next year or two, they likely won’t come out ahead when they go to sell, especially when you factor in transaction costs. But, for those who plan to stay in the house for five years or longer, historical data shows they are likely to build equity and be able to sell for a profit. 

So, how long a buyer intends to stay in their home will likely have a bigger impact on the cost-effectiveness of their home purchase than the year in which they make it. 

#3 — Construction has not kept up with demand. 

George’s final point provides some much-needed context to the question of whether consumers are overpaying. Consumers may not be aware of just how much the inventory shortfall is impacting home prices and competition for available and well-priced homes (and particularly the more affordable ones). 

It’s important to drive home the point George makes in his detailed and concise framing of the situation we’re in. Our inventory situation is far from normal. 

We’re in an environment in which the market is not temporarily or momentarily undersupplied. We are structurally underbuilt. 

When I look over the last 15-20 years, the United States has grown in population, the household formation numbers—people striking off on their own after college, people getting married and starting a new household—those have not only rebounded from the last recession in 2008-09, but have actually grown tremendously. What hasn’t happened over this period has been enough new construction. And so, by various calculations, we’re underbuilt from anywhere from around 2.5 million to possibly 5 million new homes. What that means is there are more people wanting to buy homes than there are actually homes in the market. And that’s not just because of the pandemic and because of low interest rates and all the temporary issues. It’s a fact we have not built enough homes for the population growth.

George Ratiu

KCM Chief Economist

As a result, if you’re buying a home today, even if builders double the volume of new homes that they’re building—and they’re not—your market balance is not going to be in an overbuilt situation for a long time. So, long answer to say yes, it feels like we’re paying a lot of money for homes today—and, compared to three years ago, yes, it’s a lot of money. At the same time, the market dynamics are different in that way, and we need a lot more new construction just to bring us to an equilibrium state, let alone one in which we can worry about outright massive decline in prices.

George Ratiu

KCM Chief Economist

So, we can acknowledge how it feels for buyers to pay more than they might expect for a home purchase. But the reality of lagging home construction, not to mention the above-median prices of most newly built homes across the country, is amplifying buyer demand for affordable homes—and with it the cost of buying one.

Listen to the full podcast to hear more.