Rent vs. Buy & Interest Rates (oh my!)

If rising home prices leave you wondering if it makes more sense to rent or buy a home in today’s housing market, consider this. It’s not just home prices that have risen in recent years – rental prices have skyrocketed as well. When you are trying to decide whether to rent or buy a home, consider the advantages homeownership offers. Buying a home can help you escape the cycle of rising rents. Rents have been rising aggressively for decades (see chart below right). When rents rise, you pay more but you don’t get more. You won’t see a return on your investment and you limit your ability to save. Homeownership is a powerful wealth-building tool, when you own, you gain equity as home prices rise and as you make your monthly payments. There’s a reason why homeowners have a higher net worth (see wealth gap chart below left). Also, homeownership is historically a great hedge against inflation, with inflation high, landlords may be even more likely to increase your rent.

While the Federal Reserve is working hard to bring down inflation, the latest data shows the inflation rate is still high, remaining around 8%. This news impacted the stock market and added fuel to the fire for conversations about a recession.

You’re likely feeling the impact in your day-to-day life as you watch the cost of goods and services climb. The pinch it’s creating on your wallet and the looming economic uncertainty may leave you wondering: “should I still buy a home right now?” If that question is top of mind for you, here’s what you need to know.

In an inflationary economy, prices rise across the board. Historically, homeownership is a great hedge against those rising costs because you can lock in what’s likely your largest monthly payment (your mortgage) for the duration of your loan. That helps stabilize some of your monthly expenses. James Royal, Senior Wealth Management Reporter at Bankrate, explains:

“A fixed-rate mortgage allows you to maintain the biggest portion of housing expenses at the same payment. Sure, property taxes will rise and other expenses may creep up, but your monthly housing payment remains the same.”

And with rents being as high as they are, the ability to stabilize your monthly payments and protect yourself from future rent hikes may be even more important. Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), explains what happened to rents in the latest inflation report:

“Inflation refuses to budge. In September, consumer prices rose by 8.2%. Rents rose by 7.2%, the highest pace in 40 years.”

When you rent, your monthly payment is determined by your lease, which typically renews on an annual basis. With inflation high, your landlord may be more likely to increase your payments to offset the impact of inflation. That may be part of the reason why a survey from realtor.com shows 72% of landlords said they plan to raise the rent on one or more of their properties in the next year.

Take a look at the chart below to prove the point that you should pay yourself, not your landlord. If you are paying $1,500/month in rent in 5 years you will pay $97,825.58, 10 years you will pay $217,821.30 and in 20 years your total rent payment will be $545,559.44. Think of the house you could buy with that money, pay yourself!

Becoming a homeowner, if you’re ready and able to do so, can provide lasting stability and a reliable shelter in times of economic uncertainty.

Mortgage rates have increased significantly in recent weeks. And that may mean you have questions about what this means for you if you’re planning to buy a home. Here’s some information that can help you make an informed decision when you set your home-buying plans.

As mortgage rates rise, they impact your purchasing power by raising the cost of buying a home and limiting how much you can comfortably afford. Here’s how it works.

Let’s assume you want to buy a $400,000 home (the median-priced home according to the National Association of Realtors is $389,500). If you’re trying to shop at that price point and keep your monthly payment about $2,500-2,600 or below, here’s how your purchasing power can change as mortgage rates climb (see chart on left). The red shows payments above that threshold and the green indicates a payment within your target range.

As the chart shows, as rates go up, the amount you can afford to borrow decreases and that may mean you have to look at homes at a different price point. That’s why it’s important to work with a real estate advisor to understand how mortgage rates impact your monthly mortgage payment at various home loan amounts.

The rise in mortgage rates and the resulting decrease in purchasing power may leave you wondering if you should wait for rates to go down before making your purchase. Realtor.com says this about where rates could go from here:

“Many homebuyers likely winced . . . upon hearing that the Federal Reserve yet again boosted its short-term interest rates by three-quarters of a percentage point—a move that’s pushing mortgage rates through the roof. And the already high rates are just going to get higher.”

So, if you’re waiting for mortgage rates to drop, you may be waiting for a while as the Federal Reserve works to get inflation under control.

And if you’re considering renting as your alternative while you wait it out, remember that’s going to get more expensive with time too. As Nadia Evangelou, Senior Economist and Director of Forecasting at the National Association of Realtors (NAR), says:

“There is no doubt that these higher rates hurt housing affordability. Nevertheless, apart from borrowing costs, rents additionally rose at their highest pace in nearly four decades.”

Yes, affordability is a challenge right now. It is true that it costs more to buy a home today than it did last year, but the same is true for renting. This means, either way, you’re going to be paying more. The difference is, with homeownership, you’re also gaining equity over time which will help grow your net worth. The question now becomes: what makes more sense for you?

One of the best ways to explain this is that homeownership truly wins over time. It’s a long-game. We can’t control what’s going to happen with mortgage rates or price appreciation, but we can control what we prioritize. That way, in times of uncertainty, you see these factors less as stop signs and more as opportunities for growth and change.

Danielle Hale, Chief Economist for Realtor.com® said, "For homeowners deciding whether to make a move this year, remember that listing prices – while lower than a few months ago – remain higher than in prior years, so you're still likely to find opportunities to cash-in on record-high levels of equity, particularly if you've owned your home for a longer period of time. And for prospective buyers grappling with affordability, you may have more bargaining power than you realize, particularly in areas where time on market is rising."

A wise person once told me “Marry the house and date the rate.” Remember you can always refinance down the road when rates drop.

While there’s no way to say with certainty where mortgage rates will go from here, there is something you can do to stay informed, and that’s connect with a trusted real estate advisor. I keep my pulse on what’s happening today and can help you understand what the experts are projecting. I am here and happy to help you in your decision making process, just reach out!