It Might Be A Good Time To Rent
I’ve written before about the affordability gap to housing in the U.S., breaking it down by state. Well things don’t seem to be getting easier for Americans in regards to buying an affordable home.
Bloomberg has reported that Americans are spending the largest percentage of their incomes on mortgages since the second quarter of 2009. The data and full report are from Zillow and were released in late June.
Home prices have been going up in the U.S. for a while now. After a five year decline from 2007 – 2012, the last six years have seen a steady rise.
Here’s the House Price Index since 2010.
Incomes have been increasing during this period as well, but they simply haven’t been keeping pace. In addition, mortgage interest rates have been climbing, especially since the fourth quarter 2016.
Here’s the chart of the 30-year fixed rate since 2015.
The rate is creeping up toward 5%, which it’s been below since October of 2009. Historically 5% is still a great rate, but we’ve been spoiled for a decade. It’s crazy that 5% seems high to many people but in the grand scheme of things it’s still relatively low.
Reminder Of The Big Three
Optimizing the big three expenses – housing, transportation, and food – should always be task #1 to maximize your savings rate. I’ve written about the big three showing the geographic breakdown by state.
With housing prices and interest rates going up steadily, it might be time to reconsider renting instead of buying if you’re making a move in the near future.
As Apartmentlist.com reports, rental prices across America have been rising as well, but the increase from 2017 to 2018 has only been 1.2%, much smaller than the two previous years. The increases from those years were 3.1% and 2.8% respectively.
A 1.2% increase is actually below the predicted inflation rate of 1.9% for 2018.
I realize the rent versus buy debate has lots of angles and supporters on both sides. And it gets heated sometimes.
I do not believe buying a house to live in is a good financial investment, in most cases. Buying houses as investment properties or AirBnB rentals is a different story, and many do extremely well with that strategy.
But choosing to rent or buy for your primary residence is a whole different ballgame. I’ve also posted about that subject before, highlighting a very useful tool that does detailed calculations based on geographic location.
A Possible Solution
Perhaps a solution to make homes more affordable is to make them smaller. I’m not advocating for tiny homes or expecting people to live in sprinter van-sized houses.
Another Bloomberg report says that new home sizes actually shrunk in 2017 for the first time in a long time. They report the peak size reached a median of 2,467 square feet in 2015.
But in 1973 the median size of a new home was 1,525 square feet.
Were we suffering from lack of space in 1973?
I realize that the free market is, well, a free market so homes will get built to the size that consumers want them. And clearly they want them big.
So unless people start demanding smaller homes, they won’t get them en masse. It’s only logic that smaller homes would cost less, and having more of them available on the market would perhaps help to reverse this crisis of home affordability.
Even though the tiny house thing has been trendy for a while, I believe it’s just that, a trend. I’m not expecting it to continue.
So with rising home prices, rising interest rates, and average rent rates that have slowed their annual increase, it might just be time to consider renting.
I think (at least in the big cities) the bigger conflict is developers chasing higher profits in luxury apts and condos instead of the much needed affordable ones. Demand for luce dropped like stone and with the rate hikes, the overall data looks ugly. I’m glad we’re moving away from the 2500 sq homes. 1500 is perfect unless you have 5 kids or something.
The luxury condos in DC are outrageous. They literally charge $45,000 for a parking spot. Condo fees routinely go over $1k a month.
It’s not so much “chasing higher profits” right now as chasing profits period. Land and construction costs are so high that it’s hard for developers to make anything work that isn’t as large as possible and as fancy as possible. Which obviously comes with it’s own set of problems 😉 Doesn’t help that here in Washington at least legislation is such that condos are not something that are really an option to build, unless you add in enough buffer for when you inevitably get sued.
The unfortunate part about the United States, everyone is so Sue happy!
Interesting comment Angela, you obviously know more about the home-building industry than I do. Some of my friends are architects so I should hit them up on this topic to get myself edu-macated 😉
2500 square feet is huge and for two people, 1000 should still be more than enough.
It’s all about keeping up with the Jones’ and I imagine that the fear of crime in small house areas pushes people to bigger homes in safer areas? Maybe I’m wrong here.
My 1400 sq, ft home is plenty enough for me, my bikes, and my guitars 🙂
I think that there will be a trend in renting as well.
Millennials so far have shown the propensity to rent as they look to favor being in the middle of the action in downtown etc and housing prices there are outrageous in the big cities and renting is the only option to give them access to nightlife and convenience.
Then you have the older generation that does not want to maintain a property and downsize as well and they are thus turning to renting.
That is a reason why I think multifamily apartments have a good forecast for investment and I have been doing just this for the past year
Interesting option on multifamily apartments. I also agree that millennials show a propensity for cities and not having a car. But will that change as more of them have kids?
When I was a teenager, I thought the McMansion home was the pinnacle of the American Dream.
Growing up, our closest family friends owned (still do) one of the more famous auto dealers on the east coast. The father was the founder of the operation, and he eventually bought the family a McMansion style home in a very wealthy Northern Virginia suburb. It had the 3 level pool, movie theater, 6 car garage, etc., and that is what I equated to the ultimate success in our country.
Now is a different story…
Those massively sized homes just look like a financial/property maintenance nightmare to me, and my wife and I actually want a smaller 2 level (maybe even 1 level) home to raise our family.
The difficult part now is that if you live in a high cost living area (like Washington D.C. for my wife and I), saving for a home is one of the most exhausting/time consuming efforts there is. It was hard to save the amount we needed while renting for 2.5 years, which is why we moved back in with my parents couple months ago, so that we could speed the saving process up. The new homes we saw being built ranged from $650 – 999k, for town homes and single family homes respectively. Prices like these in major metropolitan areas are really begging the question of what is the smarter financial option, in regards to renting vs. buying.
I don’t know how it will ever happen, but hopefully (fingers crossed) home prices in these markets will drop to a affordable level again. Unfortunately, I don’t see that happening anytime soon…
It’s tough for you and your wife Sean. I bought my house in 2001, and it’s inside the beltway. It wasn’t cheap then per se, but in relative terms it wasn’t as out of reach as things are now.
Well the equity in your home must be looking really nice now!:)
I wouldn’t attach the word “tough” to me and my wife’s situation, only because we are blessed to make a good income together, and are blessed to have a family support system that is aiding us in our journey. There are definitely A LOT more individuals who have a tougher scenario than my wife and I do, but I get what you are saying.
I believe the true tough part is that the DMV area is such a great place to raise a family, but the majority simply can’t afford to live that dream here anymore. It has become way to difficult for young new home buyers to get their foot in the door in this market, and if they do, they have a hard time making the payments. They almost have to make a decision between saving for retirement or making the mortgage payments. Most struggle to do both here.
Even studios/1 bed room apartments in the area are approaching the 300k range -____-
Yes, my house has done very well. Actually when I think of what it would sell for it kind of makes me think “really?”.
To your point, the last thing younger folks need is a massive, insane mortgage on top of the student loan debt they probably already have. That’s no way to start your working life.
i started reading your post and paused to look at cheap properties where we might want to retire. we just might cash out in the next few years and build a house with all the feature we want, which aren’t many. i think we could do it for under 220k with studio space. i would build it accessible for when we’re crippled up in old age.
when you can live modestly and enjoy a simple life, the home affordability issue isn’t as much of an issue 🙂
As a landlord with our halfplex currently vacant, we are discovering just the same thing, but from the owner’s point of view. My husband bought this half-duplex in 1983 for $53,000 and it now shows on Zillow for $185,000. We could probably rent only for $950 and I realize that here in Northern California, a lot of the investment is not as much for cash flow, but appreciation. Still, we are really thinking it is time to sell. But… that big 20K of Obamacare subsidy would have to be paid back and all the capital gains paid too. Oh, what to do?
The ACA subsidy adds complexity to your situation for sure. You’d have to get out some calculators and run numbers, but who even knows how long the ACA will be the same?
Housing affordability is a massive problem here in Minneapolis where we live. I have owned my home since 2015 when prices were still pretty good. I bought a house that needed lots of renovations and therefore we got a pretty good price. We also purchased a rental property not long ago and we are definitely taking advantage of the rising number of renters due to housing affordability. However, if I could start over again, I would not buy a personal residence. If I felt the need to own where I live, I would have bought a duplex or a quad and lived in one part to rent the rest. The discussion has come up many times between my wife and I about what we’ll do next. Our personal home was purchased at a price that makes a lot of sense to rent it out once we are ready to move. But where do we go? We want to live on a lake, but there’s no way in heck we’re going to buy a lake home for half million dollars and pay outrageous taxes. We’ve tossed around the idea of renting a home as our next move and putting all our money that we would have used for a 20% down payment towards investing, AND we’ll never have to worry about replacing that siding. In the caliber home that we’d want to live in, the rent would be far lower than a mortgage would be for that same property.
Great topic, this should spark some debate on buy vs rent.
Where do we go? That’s the same problem so many folks face. As prices keep going up, options keep going down.
I think it’s great that the average size is coming down a bit. 2,500 sq ft is huge. You’d need a cleaning staff for a big house like that.
I guess rent vs buy really depends on the market. I’d rather own today, but maybe renting will make sense someday.
Agreed, my Buddy had a 4000sq. ft monstrosity for a while and it was ridiculous. He almost got divorced because of it and righted the ship, thankfully.
I find a lot of what you said quite interesting. Interestingly, Connecticut has not moved much on home prices for most of the last 10 years. I think the bad economic situation of the state is the reason along with all the large companies leaving. The latter making the former worse, but bad choices by the state congriscritters being the other problem. What I gather from what I read is that the state made lots of bad choices regarding their expenses on a variety of issues. I think that is one reason why a lot of companies like GE left.
For us, we live in a town where people are tearing down all the normal sized houses, ours is “small” at just over 1800 sq feet, and putting up 3000 sq ft homes. One of my neighbors was going to do the same, but before the 2008 crash, he had a bad feeling. A lot of those who did before that crash suffered, and more than a few of the friends of my neighbor lost homes. I can only imagine how bad that must have felt, and it’s a big reason we did not buy the house that our loan company or realtor told us we could afford. I should add that when we told her what we wanted, she was fine with out limit after we pushed back once.
At the end of the day, low price housing is what most Americans need. Many places like NYC are pricing even low cost renters out. I think the answer will be smaller homes again. Hopefully, people will want it for the right reasons, the ones we all talk about, as opposed to being forced into it.
Great comment GenX, let’s hope sizes keep decreasing but ultimately consumers get what they want, so they have the control.
Great article and very true. Will Millennials being more college debt burdened, they are starting families later, and renting longer. Many saw their parents go through the 2008-9 crash and don’t want anything to do with owning, ever.
I work in this industry and the home prices are only going to increase, unless a black swan, for the foreseeable future. So either get off the sideline and buy now or be comfortable renting. The biggest key, as you pointed out is the lack of “starter” homes. When something does come on the market, the large institutional investors buy them up and then turn around and rent them out.
We are just in a tough period of housing right now which is why you see multi-family exploding. There are some good opportunities out there to invest in the multi-family space and see great returns because of the Millennials and Baby-Boomers!
Great advice – and thanks for the compliment!
Great article! Helps reinforce what I am doing right now by renting is the right thing to do! I considered buying a house in San Diego, but saw that the market conditions were not right. I noted this in an article on my site (shameless plug).
Thanks for another data point.
On another note, 2500 ft^2 is a large house. I mean that’s probably as big as I would want. I grew up in a 4500 ft^2 home and that thing was pain to clean growing up and doing chores.
I agree, 2500 sq. feet is massive to me. I’ve never lived in anything bigger than 1700sq ft.