A recent analysis in Forbes queried whether the recent rise in mortgage rates makes a difference to those deciding whether to rent or buy. Their verdict? It’s still much cheaper to buy than to rent, overall. The analysis leads us to reflect a little on the market volatility occasioned by modest (some would say almost negligible) interest rate increases.
The analysis by Trulia calculated mortgage and rental costs for identical properties, including all applicable costs, taxes, tax deductions, and a 20 percent down-payment. It came to the conclusion that on a nationwide basis that buying is on average 41 percent cheaper than renting.
Historical Perspective
Of course, local markets vary widely. In each market there is an interest-rate “tipping point” at which it becomes cheaper to rent than to buy. Nationally, that point is an interest rate of 10.5 percent -- a rate not seen in the past 23 years. Of course, rates were that high in the 80s, so it’s not impossible that they may be there again eventually, but we aren’t there yet -- not by a long shot. Speaking historically, interest rates are still very low:
Interest Rates: Keeping Some Perspective
Source: FRED Economic Data, St Louis Fed
The markets are skittish about the potential tapering of Fed stimulus. We just observe that, first, signs suggest that this tapering is not imminent (as we discuss below); and second, that today’s 3.9 percent mortgage rate, although higher than 3.5 percent of the few months ago, is a far cry from the interest rates that would bring us to a place which altered the rent-or-buy calculus and began to put a significant dent in demand.
The “Tipping Point”
The metropolitan areas with the lowest tipping points are shown below:
- San Jose, CA 5.2%
- San Francisco, CA 5.4%
- Honolulu, HI 5.8%
- New York, NY-NJ 6.8%
- Orange County, CA 6.8%
- Los Angeles, CA 7.5%
- San Diego, CA 7.5%
- Ventura County, CA 8.0%
- Sacramento, CA 8.0%
- Oakland, CA 8.2%
Besides the rise in interest rates that would be necessary to stop demand for homes to buy, there’s several years’ worth of pent-up demand coming to the surface as the economy rebounds -- pent-up demand from a maturing “Gen Y” who are hitting prime home buying age just as the post-Great-Recession recovery is starting to pick up steam. Inventory is tight, and the backlog of distressed homes has been largely cleaned out. Nationally, only 4.1 months of housing inventory is on the market -- a very low figure. Are home prices rising too fast? For now, the consensus is that nationally prices are rebounding from recession lows and still far off from their pre-recession peak. Further, over the last few years the presence of distressed property sales skewed the home price data artificially lower; and in the last few months as the share of distressed sales grows smaller, prices have seemed to rise faster. In short, prices are rising, but perhaps not quite as fast as they seem to be.
All these factors together indicate to us that the modest interest-rate rise we’ve just seen is not going to derail the rebounding housing market unless it goes at least 1 or 2 percent higher. This view is corroborated by the housing analysts at several major banks.
To Learn How to Receive the Full Premium Commentary, Please Click the Following Link: Gold Subscription
