Could Rising Rents Hurt Ownership?

July 21, 2015
ECONOMIC COMMENTARY
The prevailing opinion is that rising rents will cause more consumers to purchase homes. This is absolutely the case as you have seen statistics published time and time again that show it is actually cheaper to own in most areas of the country as opposed to renting. In addition, the stats continue to show rents rising from month-to-month and year-to-year. So how could rising rents hurt home ownership?

If you are a renter, you are likely spending a greater portion of your income towards your rent. Therefore, as rents rise, it is harder and harder to save for a down payment. That is why many Millennials are staying at home with their parents and when they move out, they are purchasing instead of renting. But for others, it gets harder.

What does this mean? For most, it means that the faster you become a homeowner, the better. Once you are a homeowner, you are protected from inflationary increases in payments as only a small portion of your payment (taxes and insurance and association fees) is subject to annual increases. Eventually, more apartments will be built and the rent/ownership equation should even out. For now, we are seeing first time homebuyers starting to awaken to the fact that sooner is better with regard to home ownership.

WEEKLY INTEREST RATE OVERVIEW

The Markets. Rates on home loans rose last week in reaction to the agreement between Europe and Greece. Freddie Mac announced that for the week ending July 16, 30-year fixed rates rose to 4.09% from 4.04% the previous week. The average for 15-year loans increased to 3.25%. Adjustables were mixed, with the average for one-year adjustables remaining 2.50% and five-year adjustables rising to 2.96%. A year ago, 30-year fixed rates were at 4.13%, close, but still higher than today’s levels. Attributed to Sean Becketti, Chief Economist, Freddie Mac — “The crisis in Greece continues to generate volatility in U.S. Treasury yields. The tentative agreement hammered out last weekend gave investors the confidence to pull back a bit from Treasuries. Rates rose about 16 basis points on the 10-year Treasury from last week. As a result, the average rate on a 30-year fixed-rate loan rose 5 basis points this week to 4.09 percent, the highest level since October of last year.” Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.  

Current Indices For Adjustable Rate Mortgages
Updated July 17, 2015
Daily Value Monthly Value
July 16 June
6-month Treasury Security  0.10%  0.09%
1-year Treasury Security  0.29%  0.28%
3-year Treasury Security  1.05%  1.07%
5-year Treasury Security  1.66%  1.68%
10-year Treasury Security  2.36%  2.36%
12-month LIBOR  0.770% (June)
12-month MTA  0.183% (June)
11th District Cost of Funds  0.687% (May)
Prime Rate  3.25%

REAL ESTATE NEWS
 Rents have been soaring across the country, even outpacing home values, according to a recent Zillow report. And it’s not just a big city problem. “Places that were more traditionally affordable are growing more quickly,” said Skylar Olsen, senior economist at Zillow. The reason? A shortage of available rentals. “Vacancy rates are at very low levels, which continues to push rents higher,” said Andrew Jakabovics, senior director, Policy Development & Research at Enterprise Community Partners. There’s a lot of pressure on the rental market: Millennials are renting longer, housing inventory is tight and Baby Boomers are downsizing. There’s also been a shift in people wanting to live in more urban areas, where renting is more common. But there just aren’t enough “For Rent” signs to keep up with the demand. Rental construction slowed in the aftermath of the housing crisis as confidence shrank. “We weren’t building enough so when the economy recovered, vacancy rates got very tight,” said Hans Nordby, a managing director with real estate research firm CoStar Group. “If you don’t build apartments, it pushes rents up.” Adding more supply will eventually ease some price pressure, she said. “It just takes time to creep down the distribution. People living in the older units now that aren’t as luxurious migrate over to the new luxury units, and that opens up more units.” But it takes about two years for rental buildings to become available in many markets, Nordby said, so the relief won’t be immediate. Source: CNN/Money

When it comes to finding the ideal environment for you and your family to live, it goes without saying that safety is a top priority. But will you be safer in the city, living among groups of people or going it alone in a rural atmosphere? Before jumping into somewhere based on your instincts, use some basic research techniques to find out the facts. Safety has many faces, from physical to financial, and each environment has its own risks and rewards. The best choice for you depends on the facts you ferret out. All things being equal, it seems logical that it would be safer to live in the quiet countryside than in a busy city. Not true, according to a study in the Annals of Emergency Medicine. It states that the risk of injury or death from both crime and accidents is more than 20 percent higher in the countryside than in urban areas. The risk of homicide might be greater in large cities, but dangers from auto accidents is significantly higher in the country, where people drive more often and longer distances. In addition, you’re subject to the same online thieves whether you live in the city or country, but the risk of identity theft may be more prevalent in the city. Purse snatching and card reading are still major methods for stealing personal information, and you’re much more likely to come across these problems living in the city. You can change these odds for your own family, though, by being smart and prepared. Source: Realty Times

For the fifth consecutive month, the number of houses under contract are up—and it’s the most activity we’ve seen since the height of the housing boom, the National Association of Realtors® reported. NAR’s Pending Home Sales Index for May, an indicator based on contract signings for existing single-family homes, condos, and co-ops, increased 0.9% over April to 112.6. That’s 10% higher than last year, and the highest level of activity since April 2006, when the index was 113.7. “That is an enormous increase in activity year over year,” says Jonathan Smoke, our chief economist, adding that May’s index “puts an exclamation point on all home sales data points for the month. “This spring is the healthiest and best overall spring since the peak of the housing boom,” adds Smoke. “Our report shows that the trends continued in June, which should lead to continued good news through June and into the summer.” And it’s not just volume that’s up: Sale prices increased, too. Smoke’s preliminary analysis of our site’s data for the first three weeks of June shows a median list price of $233,000—a 2% increase over May and 7% increase over last year. Source: Realtor.com® 

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