To Buy or to Rent? In This Housing Market, it’s Far From Obvious

Photo (cc) by See-ming Lee 李思明 SML

Rents are increasing in most parts of the country. That normally nudges apartment dwellers into the housing market — as rents rise, so do reasons to buy a home — but that doesn’t seem to be happening in today’s topsy-turvy housing market.

Instead, many renters are swallowing the increases and staying put, suggests new research by Freddie Mac.

“We’ve found that rising rents do not appear to be playing a significant role in motivating renters to buy a home,” said David Brickman, executive vice president of Freddie Mac Multifamily. “This contradicts what some in the housing market think as they expect more renters ought to be actively looking to purchase a home. We believe rising rents are primarily a sign of increased demand rather than a signal that home purchases will be increasing.”

There’s another simple explanation. House prices are rising in many areas, too, tilting the rent/buy equation back toward renting. According to Zillow real estate research, the break-even point at which buying saves money over renting has actually stretched from 1.5 years to 1.9 years in the future, on average. In places like California, it can take five years to profit from buying over renting.

But since all housing is local, the “should I buy?” question is complex right now. This is just the reason I’m working on The Restless Project.

Rents rose 3.6 percent in 2014 and are expected to rise 3.4 percent above inflation this year. Rents are up even more in cities like Seattle, Charlotte, Portland and Denver. It’s clear landlords have the upper hand in many places, creating tremendous future cost uncertainty for renters.

Some 38 percent of renters said they had experienced an increase in the past two years. Many in this rent-raised group would like to buy a home, but 70 percent told Freddie Mac they can’t afford it, and 51 percent said they had put off plans to buy a home.

In fact, a substantial number of renters are headed in the other direction: 28 percent said they were considering or had already begun living with a roommate; the same number said they need to move into a smaller rental.

Since Freddie Mac did a similar survey last August, positive attitudes toward renting have ticked upward, despite the rent increases. In the most recent poll, 72 percent agreed with the statement that renting provides “protection against declines in home prices,” compared to 66 percent last year. And 80 percent like that renting offered “flexibility over where you live,” compared with 68 percent last year. That’s important for young people — anyone, really — who see very little long-term security in their job.

Renting continues to be an appealing choice to young adults who might otherwise be entering the housing market, which tells part of the story about the up-and-down housing recovery.

The mixed bag of data reports continued this week. New housing starts surged in April to their highest level in seven years, a hopeful sign for those cheering on higher housing prices. Meanwhile, existing home sales sank — in part because of rising prices and shrinking inventories. Stories of renewed local bidding wars and homes selling above list price can be spotted from Boston to Seattle.

High prices, of course, are bad for renters and other first-time homebuyers. More than one-third of U.S. households now rent their homes, and renters account for all net new household growth over the last several years, says Freddie Mac.

“From a purely affordability standpoint, renters who have saved enough to make a 10 percent down payment are better off buying in the majority of markets across the country,” said Daren Blomquist, vice president at RealtyTrac. “(But) keep in mind that in some markets buying may be more affordable than renting, but that doesn’t mean buying is truly affordable by traditional standards. … In those markets, renters are stuck [between] a rock and hard place when it comes to deciding whether to try to buy or continue renting.”

The chief thing keeping renters in their apartments? That’s obvious, says mortgage broker and housing expert Logan Mohtashami.

“Main street America simply doesn’t have the income,” he says.

For more on why renters do or don’t become buyers, here’s an interesting paper on the New York Fed’s website.

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