In a blog post published last Friday, sick CNBC’s Diana Olnick reported on the latest results of the FAU Buy vs. Rent Index. The index examines the entire US housing market and then isolates 23 major markets for comparison. The researchers at FAU use a “‘horse race’ comparison between an individual that is buying a home and an individual that rents a similar-quality home and reinvests all monies otherwise invested in homeownership.”
Having read both the index and the blog post, cheapest we would like to clear up any confusion that may exist. There are three major points that we would like to counter:
The CNBC blog post was titled, “Don’t put your money in a house, says a new report.”The title of the press release about the report on FAU’s website was “FAU Buy vs. Rent Index Shows Rising Prices and Mortgage Rates Moving Housing Markets in the Direction of Renting.”
Now, we all know headlines can attract readers and the stronger the headline the more readership you can attract, but after dissecting the report, this headline may have gone too far. The FAU report notes that rising home prices and the threat of increasing mortgage rates could make the decision of whether to rent or to buy a harder one in three metros, but does not say not to buy a home.
According to Freddie Mac, mortgage interest rates reached their lowest mark of 2017 last week at 3.89%. Interest rates have hovered around 4% for the majority of 2017, giving many buyers relief from rising home prices and helping with affordability.
While experts predict that rates will increase by the end of 2017, the latest projections have softened, with Freddie Mac predicting that rates will rise to 4.3% in Q4.
Of the 23 metros that the study reports on, 11 of them are firmly in buy territory, including New York, Boston, Chicago, Cleveland, and more. This means that in nearly half of all the major cities in the US, it makes more financial sense to buy a home than to continue renting one.
In 9 of the remaining metros, the decision as to whether to rent or buy is closer to a toss-up right now. This means that all things being equal, the cost to rent or buy is nearly the same. That leaves the decision up to the individual or family as to whether they want to renew their lease or buy a home of their own.
The 3 remaining metros Dallas, Denver and Houston, have experienced high levels of price appreciation and have been reported to be in rent territory for well over a year now, so that’s not news…
One of the three authors of the study, Dr. Ken Johnson has long reported on homeownership and the decision between renting and buying a home. The methodology behind the report goes on to explain that even in a market where a renter would be able to spend less on housing, they would have to be disciplined enough to reinvest their remaining income in stocks/bonds/other investments for renting a home to be a more attractive alternative to buying.
Johnson himself has said:
“However, in perhaps a more realistic setting where renters can spend on consumption (beer, cookies, education, healthcare, etc.), ownership is the clear winner in wealth accumulation. Said another way, homeownership is a self-imposed savings plan on the part of those that choose to own.”
In the end, you and your family are the only ones who can decide if homeownership is the right path to go down. Real estate is local and every market is different. Let’s get together to discuss what’s really going on in your area and how we can help you make the best, most informed decision for you and your family.
The biggest challenge to today’s housing market is the shortage of housing inventory for sale. A normal market would see a six-month supply of homes for sale. Currently, remedy that number is below four months. This is the major reason home prices have continued to appreciate at higher levels than historic averages.
The good news is that builders are now starting to build more homes in lower price ranges.
The Housing Market Index from the National Association of Home Builders (NAHB)reveals that builder confidence increased last month. HousingWire quoted NAHB Chief Economist Robert Dietz about the reason for the increase in confidence amongst builders.
troche Times, serif; margin: 0px; padding: 10px 20px 10px 50px; outline: 0px; border: 0px currentColor; color: #444444; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; vertical-align: top; white-space: normal; orphans: 2; widows: 2; quotes: none; font-size-adjust: none; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;”>“The HMI measure of future sales conditions reached its highest level since June 2005, a sign of growing consumer confidence in the new home market. Especially as existing home inventory remains tight, we can expect increased demand for new construction moving forward.”
Builders are not only jumping into the market – they are doing a better job of matching current demand. The Wall Street Journal recently reported:
“In a shift, new households are overwhelmingly choosing to buy rather than rent. Some 854,000 new-owner households were formed during the first three months of the year, more than double the 365,000 new-renter households formed during the period, according to Census Bureau data.”
The WSJ article went on to say:
“Home builders are beginning to shift their focus away from luxury homes and toward homes at lower price points to cater to this burgeoning millennial clientele.”
The graph below compares 2016 to 2017 new construction sales by price point. As we can see, builders are slowly beginning to shift to prices more favorable to the first-time and non-luxury buyer.
There is a drastic need for a larger supply of home inventory to meet the skyrocketing demand. Builders are finally doing their part to help rectify this situation.