Our hot real estate market doesn’t show any signs of slowing down. Current market conditions have some homebuyers considering abandoning their search in favor of renting until conditions become more favorable and has some homeowners considering taking advantage of current market conditions, cashing out, and renting until the market turns. Only you can decide the best course of action for you and your family, but to help you make that decision in this blog post I’m going to take a look at the cost of renting vs buying along with how the current market compares to years past in terms of affordability (you may be surprised!)

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It’s tough trying to buy a home right now. Limited inventory, multiple offers, and bidding wars have caused some homebuyers to give up. The latest numbers show new mortgage applications decreased last week, but is putting your search on hold and continuing to rent really the best option? Truth is, everybody’s situation is different, and what is right for you might not be right for everyone. Likewise, some homeowners are considering cashing out and renting for a few years in the hope the market will turn and they’ll be able to re-enter the market at a lower price. While nobody I know has a crystal ball to know what the future housing market looks like, there are a few factors to keep in mind.

Whether you decide not to buy and continue renting or sell and rent for the next few years, the assumption being made is the housing market is going to turn and prices are going to drop in the years ahead. While we all know the real estate market runs in cycles and it will eventually turn, a correction doesn’t mean a crash. I know of several buyers that made the decision a couple of years ago to wait that now find themselves unable to buy anything close to what they could have had they went ahead and purchased originally. The vast majority of industry experts don’t believe that housing is currently in a bubble or that a crash is on the horizon (See What the Experts Have to Say About a Housing Bubble in 2021).

Housing affordability is a different issue that I’m going to discuss a little later, but keep in mind that home prices are not the only thing that have been rising over the past few years, rents have as well as shown on the following graph:

High demand and low supply are what’s driving home prices currently (Why Are Home Prices Rising So Fast). The limited supply of homes to buy has put additional pressure on the rental market as well. Have you noticed an increase in apartment buildings in your area? They wouldn’t be building those without the demand for housing. Record low mortgage rates have helped keep housing payments in check while rents have continued to rise at an accelerated pace. As a result, the percentage of income being spent on rent outpaces the percentage of income spent on mortgage payments across all income levels:

As mortgage rates rise, which they are expected to over the next couple of years, the amount of home you can buy two years from now will almost certainly be less than it is today. One option to consider is a two-step approach to buying the home of your dreams. While it might not be your ideal home, buy the home that will work for you now, get into the market so that you are able to take advantage of equity gains, then use that equity to move into the home of your dreams a few years from now. It might not be ideal but will make it easier to buy your ideal home than it would be if you are renting and receiving no equity benefit.

If you are considering selling and renting for a few years I honestly believe that you will be better off continuing to gain equity than to get out of the market completely at this time. Keep an eye on this blog, or subscribe to my YouTube Channel, to keep up to date on the latest real estate news and trends.

Housing Affordability

One of the questions that often accompanies the rent vs buy discussion has to do with housing affordability. First, I would like to point out that housing affordability and affordable housing are not the same thing. Why they use such similar names I don’t know! Affordable housing has to do with the availability of lower-priced, entry-level homes in a given area. It is very possible that an area doesn’t have affordable housing while housing in that area is still considered affordable. Confusing, I know. Housing affordability is determined by three main factors:

1. Mortgage Rates

2. Mortgage Payments as a Percentage of Income

3. Home Prices

With that in mind, areas with higher median incomes compared to median home prices can be considered affordable even though the area doesn’t have many entry-level or starter homes.

The Housing Affordability Index is produced by the National Association of Realtors (NAR) and looks at the three factors noted above to determine the overall affordability score for housing. According to NAR, the index:

“…measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income date.”

Their methodology states:

“To interpret the indices, a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that a family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment.”

So, the higher the index, the more affordable it is to purchase a home. Here’s a graph showing national affordability going back to 1990:

Even though home prices have been rising, housing today is more affordable than at any point since the housing crash when distressed properties (foreclosures and short sales) dominated the market and considerably more affordable than between 1990 and 2008.

The biggest factor keeping homes affordable today is the historically low mortgage rates. As those rates start to rise we will see affordability levels decrease assuming all else remains the same.

Bottom Line

Only you can make the decision that’s best for you and your family and everyone’s situation is unique and different. If you would like to discuss whether now is a good time for you to buy or sell a home please Schedule a Call and let’s discuss it. There is never a cost or obligation.