Is this really ‘the worst time to buy a home’?

by — January 19, 2024 in Economy
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For four years now, the real estate market has defied all logic.

A global pandemic didn’t crash prices, it shot them to new heights. Last year, mortgage rates hit a 23-year high and sales plummeted. Still, home prices continued to rise stubbornly, creating the most unaffordable housing market in generations.

This year offers a new twist in the plot: More apartments are being built than at any time in half a century, giving renters more new apartments than they have seen in decades.

So while buying a home remains an exasperating experience, marked by high prices, high interest rates and little inventory, renting an apartment is getting easier. That means that unless you plan to live in a home for the next decade, now may not be the best time to buy it.

“This is the worst time to buy a house,” said Christopher Mayer, a real estate professor at Columbia Business School.

Yes, mortgage rates are down from their October high of nearly 8 percent, and inventory has increased as sellers return to the market. But the overall picture hasn’t changed significantly, and probably won’t anytime soon.

Most economists don’t expect mortgage rates to fall much further this year. The average 30-year fixed-rate mortgage was 6.6 percent in the third week of January, according to Freddie Mac. And while optimists like Selma Hepp, chief economist at CoreLogic, think rates could fall below 6 percent percent by the end of the year, pessimists like Skylar Olsen, chief economist at Zillow, believe they could approach 7 percent again.

Headwinds are not pleasant. In December, the number of new listings increased 2 percent from a year earlier, but was still nearly 15 percent lower than pre-pandemic levels, according to Zillow. As for prices, economists expect them to more or less stabilize this year. Redfin predicts they will fall 1 percent; Freddie Mac, which will increase only 2.5 percent, half the 2023 rate.

All of this means that anyone buying a home today will likely pay a lot of money, at a high cost of borrowing, for an asset that may have already peaked.

As Mayer said, “you are effectively buying a luxury good and it will not pay the same rate of return” as other investments.

The rental market, however, looks a little different, at least for this year.

Not since 1973 has the United States seen so many apartments under construction (about 1 million nationwide) at once. More than half will be available this year and almost all are rentals.

Many of these developments began during the pandemic, as developers banked on a market with rising rents as people uprooted their lives and moved. But building a multifamily building takes time and these buildings are entering a different landscape. Tenants, stretched to their financial limits, are no longer signing as many leases, which is driving up vacancies.

Asking rents were basically flat last year nationwide, falling nearly 1 percent to a median of $1,379 a month, according to Apartment List. In New York City, the median asking rent ($3,500 per month) rose less than 3 percent in November 2023 from a year earlier, marking the lowest increase since August 2021, according to StreetEasy.

But it is still a time of crushing housing costs, with rents 19 percent higher than before the pandemic, a period that “restarted the market at a completely new price level,” said Igor Popov, chief economist at Apartment List

Housing and housing costs were among the biggest drivers of inflation in December 2023, according to the Bureau of Labor Statistics. And last year, the typical renter was burdened by costs and was spending more than 30 percent of his or her income on rent.

“Renters need some relief,” said Bess Freedman, CEO of Brown Harris Stevens. “People can’t pay these crazy prices. “They have to have a home.”

New housing can at least keep rents from rising too much. Tenants should expect deals, with landlords offering months of free rent, gym access or parking. (In December 2023, 33 percent of Zillow rental listings included concessions, up from 27 percent in December 2022.)

“Tenants, with rising inventory, will ultimately feel more empowered to negotiate rents and concessions” in New York City, said Kenny Lee, an economist at StreetEasy.

While these new developments are concentrated in the Sunbelt and the Midwest, they can also be seen in other places, including suburbs and rural communities, said Robert Dietz, chief economist at the National Association of Home Builders. “This is really happening everywhere,” he said.

But the party won’t last long. High interest rates have spooked developers across the country, slowing down the construction process, and starts on new multifamily developments are expected to fall 20 percent in 2024, according to the National Association of Home Builders. In New York, where a property tax exemption expired, monthly applications were already being submitted for new foundations, a critical indicator of new construction. will drop 78 percent in 2023 from the previous year, according to the Real Estate Board of New York.

“I always think of this in terms of drought,” Popov said. “You may have a rainy season that helps, but you’re still in a drought.”

Last year, many potential sellers sat on their hands, unwilling to trade pandemic-era mortgage rates for much higher ones on their next home. To make matters worse, the country is short between 1.5 million and 6.5 million new homes, depending on who you ask, because developers haven’t built enough homes since the foreclosure crisis to keep up with a growing population.

The result: According to CoreLogic, fewer homes were sold in 2023 than at any time since 2014, but not for lack of demand. Despite sky-high interest rates, people still wanted to buy homes, and many found themselves navigating a bewildering world of bidding wars because there were so few available to purchase.

By October 2023, home prices had risen 45 percent since the start of the pandemic, according to the Case-Shiller Home Price Index. Combine that price growth with rising borrowing costs, 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) exceeded $2,000 a month for the first time in history, consuming nearly 35 percent of the average salary, according to ATTOM , a data analytics company. .

If you consider buying a home a decision based solely on dollars and cents, the answer is unclear, especially for anyone 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 to anyone who already owns a home with a 3 percent mortgage interest rate. Moving from one home to another of roughly the same value will cost you thousands of dollars in higher interest payments over the years.

First-time buyers also face mathematical difficulties, as rents are currently low compared to mortgage payments. Buy a $400,000 home today, with an $80,000 down payment and a 30-year mortgage with an interest rate of 6.6 percent, and the interest payments alone (not including taxes and maintenance) will cost almost $20,000. the first year.

But let’s say you find an apartment with an average rent: $1,379 a month? A year’s rental will cost you $16,550.

Put that $80,000 down payment in a mutual fund or the stock market and you’ll likely get a higher rate of return on your investment.

“If I put money into a house today, given how high prices are, I’m really saying I expect home prices to go up a lot,” Mayer said. “I don’t think that’s a realistic expectation.”

But people don’t buy houses the same way they buy stocks.

A house is not just an investment: it is a source of stability and a place to live life and perhaps raise children. There are also significant tax benefits, especially if you have owned the home for many years.

A former student of Mr. Mayer was moving to the Bay Area to look for a new job and asked for advice. Given the exorbitant price of housing in the area, the student wanted to know if it made sense for him to buy it. His rate of return on his investment didn’t look favorable in the short term, but he had other factors to consider: where his kids would go to school and finding a house in a neighborhood he liked, with a manageable commute.

In other words, he had to consider his life. Mr. Mayer advised him to buy.

Other buyers and sellers appear to be making a similar calculation. During the second week of January, mortgage applications for home purchases increased 9 percent from the previous week, according to the Mortgage Bankers Association.

As Bright MLS’s Dr. Sturtevant noted, “it’s not always about the math.”

“For some homeowners, the math may seem difficult,” he continued, but other factors come into play: Maybe they need another bedroom for a growing family, “or they need to move to be near an elderly parent or a job change. “

After a full 18 months of high interest rates, buyers and sellers may decide to make a change anyway, he said: “I think 2024 is the year ‘life happens.'”

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