It’s Becoming Cheaper To Rent

In October 2007, Robert Shiller wrote a paper about the current upswing in housing and he had an important point about fundamentals when it comes to value. “This dramatic price increase is hard to explain, since economic fundamentals do not match up with the price increases…The rent figures indicate that there has been virtually no change in the market for housing services, only in the capitalization of the value of these services into price.” Basically, rents do not support values. When it makes more sense to rent than buy people will rent. Low mortgage rates and rising rents have made home ownership an easy decision. However, now that rates are rising along with home prices that calculation has changed.

New analysis from Realtor.com has found that in 38 of the 50 largest US metros (76%), the monthly cost of renting a home is lower than buying a starter home. Just six months ago, they conducted the same analysis and found that less than half (48%) did renting make more sense than buying in the largest metros. Relatively stable rent growth contributed to this shift along with the increase in financing costs…(Realtor.com)

• Year-over-year rent growth peaked in January at 17.3% and has decreased each consecutive month. Rent in June is just 6.3% higher than in January.
• Looking at Case-Shiller data, year-over-year home prices potentially peaked in March at 20.6% and in just the first four months of the year home prices are up 9.2% looking at the 20-city composite index.

On top of the rising cost of a home, wannabe homeowners also have to deal with rising finance costs this year. Freddie Mac’s latest data has a 30-yr fixed mortgage rate at 5.51%, which is 272 basis points higher than one year ago. Back in June, a Redfin analysis found that a homebuyer on a $2,500 budget with a 6.0% mortgage rate lost $118,000 in spending power. This has pushed the average cost to buy a starter home across the 50 largest US metros to $2,437 per month this June. Meanwhile, the median listed rent was $1,876, this is $561 (29.9%) cheaper than buying.

This, of course, does not mean we are in another 2008 housing bubble. It does, however, explain the recent rapid slowdown in housing. Basic economics tells us as more people look to rent instead of buying it should simultaneously push rents higher and pull down home prices hopefully moving both towards a price equilibrium.