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  • Writer's pictureDr. Mark Lee Levine, Professor

HOME PURCHASE OR RENTAL?

Current State of the Home Ownership Market: Interest Rates and Pricing



Buy now?


It is not a new issue to focus on whether a given individual or couple should buy a home or rent a home (apartment, condo, et al).


Most potential renters or home buyers have heard the caution that such renters or buyers should not expend more than 30% of their income for shelter purposes. Of course, lately, this percentage has moved up, with many recent renters or buyers spending much more than this 30% “ceiling” amount for personal living quarters.


Interest Rates and Pricing of Homes for Sale


The movement of long-term financing rates to 7%+ has discouraged or prevented many potential buyers from acquiring a home. In place of such an acquisition, the rental market is often the stopgap. (It remains to be seen how many potential purchasers will remain on the sideline as to a purchase and when such a purchase may occur.)


As noted, this is not a new issue. Even prior to the recent increase in interest rates, many areas of the country have seen the price of homes rise to a level where the purchase price eliminates the possible buyer from the current marketplace.


With the combination of higher interest rates and higher priced homes, thus reducing the number of buyers in the market, such changes have also discouraged some current homeowners from selling their existing homes to seek a “move up” to another home. (When the current sellers sell their home, often such sellers then become buyers for another home.) The National Association of Realtors has made a big point of focusing on this issue. Inventory is reduced as to potential sales when the current homeowner recognizes that the increased pricing of another house, coupled with higher interest rates, diminishes the financial ability of the current homeowner from “moving up.” Of late, more and more current homeowners have opted to remodel or otherwise retain their current home. Thus, the supply chain of used homes available in the market appears to be facing a continuing shortage of homes, especially from the segment of the market that, historically, has been a source of additional supply as existing homeowners change their abode.


Rent or Buy?


In one article by Bruno Venditti in Visual Capitalist (Sept. 2023), it was noted that the prices and mortgage rates are higher than we have seen since the 1980s.

With this price and rate issue discouraging the purchase of a home, renting is the obvious alternative in most cases. (Yes, some people have chosen the option to stay at home with their parents, move in with others, or otherwise postpone the purchase or rental decision.)

In the same article referenced above, written by Venditti, it was noted that the current median rent in the US is about $1,850 per month; but the current median payment for the purchase of a home is about $900 more per month than the rental rate noted.


Others are Impacted, too--Domino Effect


The domino effect occurs with many areas impacted when homes are not sold. That is, more apartments may be needed. Real estate brokers generate less income from sales of homes. Mortgage brokers also lose some of their potential income stream. Others impacted by a slowing of sales can include those businesses gaining income when a home is sold. This can include title companies, those selling appliances, and others dealing with the needs of a new home purchaser, such as moving companies, etc.


Now What? (And, When?)


The questions remain as to where the market goes from here.

  • The rates will change. But, when?

  • How long will it take to move along the pipeline for existing and new homes to ramp up to allow for the current lack of transactions?

  • What happens if inflation stays high?

  • What other factors will impact the home market, such as the overall economy, changes in the political setting—with elections coming, rate changes generated in part by the Federal Reserve, other lending issues, etc.?

Many questions remain unanswered. However, it is clear: The market for used home sales has slowed, dramatically, given the rates and pricing issues discussed above.

By

Dr. Mark Lee Levine Professor, University of Denver

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