For four years now, the housing market has defied all logic.
A global pandemic didn’t make prices drop, but drove them to new heights. Last year, mortgage rates hit a 23-year high and sales plunged. Nevertheless, home prices continued to rise, creating the most ineffective housing market in generations.
This year provides a new plot twist: There are more apartments under construction than at any time in half a century, giving tenants access to more new apartments than seen in decades.
So, while buying a home remains a frustrating experience due to high prices, high interest rates, and low inventory, renting an apartment is becoming easier. This means that unless you plan to live in a home for the next decade, it may not be the best time to buy.
“This is the worst time to buy a home,” said Christopher Meyer, a real estate professor at Columbia Business School.
Yes, mortgage rates have fallen from an October peak of nearly 8 percent, and inventory has increased as sellers come back into the market. But the overall picture hasn’t changed in any meaningful way – and probably won’t change anytime soon.
Most economists do not expect mortgage rates to fall further this year. According to Freddie Mac, the average 30-year fixed-rate mortgage was 6.6 percent in the third week of January. And while optimists like CoreLogic chief economist Selma Hepp think rates could fall below 6 percent by the end of the year, pessimists like Zillow chief economist Skylar Olsen think they could get closer to 7 percent again.
Headwinds are not pleasant. In December, the number of new listings was up 2 percent from a year earlier, but still about 15 percent below pre-pandemic levels, according to Zillow. As far as prices are concerned, economists expect them to moderate more or less this year. Redfin is predicting they will decline 1 percent; Freddie Mac, that they will only increase by 2.5 percent, which is half the 2023 rate.
All this means that anyone buying a home today will pay top dollar, at higher borrowing costs, for a property that is already at its peak.
As Mr Mayer said, you are “effectively buying a luxury good, and it won’t pay the same rate of return as other investments”.
However, the rental market, at least this year, looks a little different.
Not since 1973 has the United States seen so many apartments — nearly 1 million nationwide — under construction at once. More than half will be available this year, and almost all are for rent.
Many of these developments emerged during the pandemic, when developers bet on a growing rental market as people uprooted their lives and moved in. But building a multifamily building takes time, and these buildings are entering a changed landscape. Tenants, constrained by their financial limits, are no longer signing as many leases, leading to increased vacancies.
Rental demand was basically flat across the country last year, falling about 1 percent to an average of $1,379 a month, according to Apartment List. In New York City, the average asking rent — $3,500 a month — rose less than 3 percent in November 2023 from a year earlier, according to StreetEasy, the smallest gain since August 2021.
But it’s still a time of crushing housing costs, with rents 19 percent higher than before the pandemic, a period that “reset the market to a whole new price level,” said Igor, Apartment List’s chief economist. Popov said.
Housing and shelter costs were one of the biggest drivers of inflation in December 2023, According to the Bureau of Labor and Statistics, And last year, the typical renter was cost-burdened, spending more than 30 percent of their income on rent.
“Tenants need some relief,” said Bess Friedman, chief executive of Brown Harris Stevens. “People can’t afford these ridiculous prices. They should have a house.”
New housing could at least keep rents from rising too much. Renters should expect deals, with landlords offering months of free rent, gym access or parking. (In December 2023, 33 percent of Zillow’s rental listings included concessions, up from 27 percent in December 2022.)
“For tenants, with rising inventory, they will ultimately feel more empowered to negotiate rents and concessions,” said StreetEasy economist Kenny Lee.
While these new developments are concentrated in the Sunbelt and the Midwest, they can also be seen in other places, including exurban areas and rural communities, said Robert Dietz, chief economist for the National Association of Home Builders. “It’s really happening everywhere,” he said.
But the party won’t last long. High interest rates have spooked developers across the country, the construction pipeline is drying up, and new multifamily development starts are expected to decline 20 percent in 2024, according to the National Association of Home Builders. In New York, where the property tax exemption ended, monthly filings for new foundations, an important marker of new construction, were already Down 78 percent in 2023 Since last year, according to the Real Estate Board of New York.
“I always think about it in the context of drought,” Mr. Popov said. “Maybe you have a rainy season that helps, but you’re still in drought.”
‘Mathematics makes no sense’
Last year, many potential sellers held off, unwilling to trade pandemic-era mortgage rates for their next home that were too high. To make matters worse, the country is short of 1.5 million to 6.5 million new homes, depending on who you ask, because developers have created nearly enough housing since the foreclosure crisis to keep up with the growing population. Have not made it.
The result: According to CoreLogic, fewer homes were sold in 2023 than at any time since 2014 — but not due to a lack of demand. Despite skyrocketing interest rates, people still wanted to buy homes, and many found themselves wading through a shocking world of bidding wars because there were so few available to buy.
Home prices were set to rise 45 percent since the start of the pandemic through October 2023, according to Case-Shiller Home Price Index, Combine that price increase with rising borrowing costs, and housing is now more unaffordable than at any time since 1984, according to a November report from Intercontinental Exchange, a data company. In the third quarter of 2023, the typical costs of owning a home — mortgage, insurance, property taxes — will exceed $2,000 per month for the first time in history, consuming about 35 percent of the average salary, according to data analytics company ATTOM. Is. ,
If you think of buying a home as a decision based only on dollars and cents, the answer is a clear no – especially for someone who may move again in the next few years.
“In some ways, the math doesn’t make sense,” said Lisa Sturtevant, chief economist at Bright MLS, a multiple listing service for the Mid-Atlantic region.
The math certainly doesn’t make sense for anyone who already owns a home with a 3 percent mortgage interest rate. Move from one home to another of roughly the same value, and it will cost thousands of dollars in higher interest payments over the years.
First-time buyers are also facing tough math, as rents are currently less than mortgage payments. Buy a $400,000 home today, with $80,000 down and a 30-year mortgage at a 6.6 percent interest rate, and interest payments alone (not including taxes or maintenance) will cost about $20,000 the first year.
But let’s say you get an apartment at the average rent – $1,379 per month? One year’s rental will cost you $16,550.
Pay that $80,000 upfront into a mutual fund or the stock market, and you’ll likely get a high rate of return on your investment.
“If I invest money in a house today, given how high the prices are, I’m really saying I’m expecting house prices to go up a lot,” Mr. Meyer said. “I don’t think that’s a realistic expectation.”
Eyes on forever home
But people don’t buy houses the same way they buy stocks.
A home isn’t just an investment – it’s a source of stability and a place to live your life, and perhaps even raise children. There are also significant tax benefits, especially if you have owned the home for several years.
A former student of Mr. Meyer’s was moving to the Bay Area for a new job, and he asked for advice. Given the exorbitant price of housing in the area, the student wanted to know if it was worth buying. The rate of return on her investment was not looking favorable in the short term, but she also had to consider other factors – where her children would go to school and finding a home with a manageable commute in her preferred neighborhood.
In other words, he has to consider his life. Mr. Mayer advised him to buy it.
Other buyers and sellers are also making similar calculations. During the second week of January, mortgage applications for home purchases were up 9 percent from the previous week, according to the Mortgage Bankers Association.
As Dr. Sturtevant of Bright MLS points out, “It’s not always about the math.”
“For some homeowners, the math may seem daunting,” she continued, but other factors also come into play: perhaps they need another bedroom for a growing family, “or they have aging parents to live with or a job.” Need to change.”
After 18 solid months of high interest rates, buyers and sellers may decide to make a change anyway, he said: “I think 2024 is the year of ‘life happens’.”
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