Everyone wants to know the perfect time to buy or sell their home. I know. I’m having this very conversation with my boyfriend Mick,. It’s more than a little ironic. The answer for him and everyone is the same – “NOW”.
OC Rental rates have risen steadily. Post recession, it costs the same or less to own versus rent a home in Orange County. I haven’t seen this sustained pehnomenon in my entire career. Rental rates have risen regardless of what housing prices were doing. Nope, renters didn’t get the same break that homeowners and investors did when values and mortgage payments plummeted.
So while mortgage payments have yet to reach the high mark seen in 2006 and 2007, rents are at an all time high – up by $1,400 on average. Quelle surprise (said no one ever).
We can safely assume that rents will continue their upward march at a pace of 4-5% per year regardless of market conditions, making it harder and harder for renters to save money for a future down payment.
Yet continued limited inventory in OC homes priced below $1.5M (where the demand is greatest) has caused prices to accelerate at the same 4-5% annual rate as rentals. It’s been great for sellers – not so much so for buyers.
Here’s where it gets interesting.
The Fed increased rates again on June 13th and mortgage rates ticked up a bit. We’re told to expect two more Federal Reserve rate hikes by year end. So we can safely assume that interest rates will increase by another 3/8% -1/2%. Unlike the prior recession, when the Feds sought to stop the bleeding by reducing rates and home prices dropped like a rock anyway, this time as interest rates fell home prices rose. Drastically reduced inventory has made all the difference in the world. Buyer demand has remained steady in spite of limited supply, and prices have surged since 2012.
So waiting will not only cost buyers more in monthly rent. But it will also cost more for a mortgage acquired later, rather than today. This will also hurt sellers, because the steady uptick of rates will further reduce the pool of qualified buyers and it will certainly take them longer to sell. Even if they do sell for 1-2% more in price, any gain will be negated by the added costs of staying on the market longer. Most sellers will also need to move somewhere after they close escrow. So increased mortgage rates will hit them when they become buyers in their next transactions. It’s a potential lose-lose scenario for sellers who wait. Not good.
Here’s a real life example.
As of last week, the year to date average sold price for a home in Orange County was $899,969. I’ll round that up to $900,000 for this example. This same home will typically rent for $4,000 now.
With a 20% down payment, the sample mortgage payment is likely to be $3,648 today. If sold 6-8 months later, that price will grow to $918,000+. And because of planned rate hikes, the payment should be at least $3,886. That’s an additional $238+ per month, or $2,856 in 12 months – for the same exact home. Yuck!
And if a renter was paying $4,000 today for this home, they’ll probably pay $4,100 when they renew their lease as market rents continue to increase. We have a very real housing shortage and virtually no rent control which gives landlords a lot of power. Rental rates won’t fall anytime soon – if ever.
So even though owning a home comes with the additional costs of property taxes and insurance, it also has tax benefits that balance these costs out (primarily mortgage interest deductions). Given the current prices, this means that home owners who fix their monthly housing payment with fixed rate mortgages will come out well ahead of renters who can’t, because they’re subject to market fluctuations and the whims of landlords.
If buyers flee the market when rates increase, then we may very well see a flattening of home prices. Yet even if home prices don’t increase at all, higher interest rates will still make it cost more to buy later than it would today – for the exact same home. YUCK!
Renters should go buy NOW. Sellers should sell NOW while prices are high and interest rates are low, keeping the maximum number of buyers in the game.
In summary – Buy. Sell. Now.