Rising Rent Means It Is Time To Buy
When it comes to the real estate market, many are spending too much time focusing entirely on home buyers and home sellers. Headlines abound about bidding wars for houses or low inventory. There’s nonstop commentary about whether it’s a sellers market and if conditions are tough for home buyers. There is a lot of focus on mortgage rates hovering near historic lows or home prices rising to historic highs. While these headlines are helpful for understanding the state of the real estate market, they present an incomplete picture. If you are considering whether now is the right time to buy a home, there is more to your decision than home sales. If you are on the fence about buying a house it is also important to consider what happens if you do not buy a house. One important thing to consider is what is happening with the rental market.
What is Happening with Home Rentals?
In economics, there is a concept called opportunity cost that is supposed to help us make decisions. If you are deciding whether you should take a particular action it is important to not only look at the consequences of taking that action, but also of not taking that action. When it comes to deciding if you should buy a house, the opportunity cost you should consider is what are the consequences of continuing to rent. According to recent data, the opportunity cost of continuing to rent instead of buying a home is fairly substantial. Rents are rising across the board.
Recent data from CoreLogic indicates that rent prices surged in June after steadily increasing all year. The jump in rent prices was so extreme that we have not seen anything like this happen since 2005. On average, rent prices are up over 8% from last year at the same time. What is also interesting about this data is the types of rent that increased the most. Single family detached homes are seeing their rent prices rise faster than any other rental category. This tells you that there are many people out there who want the various benefits of owning a home, but are not jumping at the opportunity to buy a home quite yet. Why is that and does it make sense?
Renting Versus Buying a House
It’s clear that rent prices are rising yet families are willing to pay in order to have a detached single family unit they can call their own. One possible explanation for why people would continue to pay increasing levels of rent for the types of homes they could purchase is that home prices are too high. While this seems like a reasonable explanation, it is not backed up by the data.
It is true that home prices have risen dramatically, which has also caused mortgage payments to increase. However, the average mortgage payment is still less than the average rent payment. According to data from the National Association of Realtors, the median monthly mortgage payment is about $371 less than the median monthly rent payment. Some might be leery about this figure and assume it does not account for recent rises in home prices, but it does. This data is only looking at mortgage payments for recently closed homes. Even in a world where home buyers are paying more than ever, mortgage payments are still less than rent.
Much of the reason mortgage payments are lower than rent is due to the fact that mortgage rates are still hovering near historic lows. Buying a home at today’s mortgage rates help lock in low monthly payments for the life of the home loan. What is also important to consider is that if you get a fixed-rate mortgage, your mortgage payments do not increase regardless of the value of your home. However, there is nothing in place that will prevent your rent from increasing. This means that the nearly $400 difference between median mortgage payment and median rent payment will increase as rents increase. Buying a home now makes a lot of financial sense given this data, but it will make even more sense over time as rent continues to increase.
Final Thoughts
When all of the headlines focus on how much it costs to buy a home it might seem scary to stop renting and become a homeowner. However, when you look at the opportunity cost of what you will miss out on if you continue to rent, the picture becomes more clear. It makes more financial sense to buy a house at today’s high prices than it does to continue renting at prices that continue to increase every single month.
If you are tired of seeing your rent increase and want to buy a home of your own, contact us. The team at Streamline Realty is here to help you find the home of your dreams at a price that makes sense for you.
