Written by Alisa Wolfson. See original article here.
Updated: Jan. 4, 2022 at 7:04 a.m. ET
What will happen to mortgage rates, housing prices and more next year?
Though housing prices have been rising, mortgage rates remain near historic lows — some 30-year rates are still around 3% and some 15-year rates around 2%, as you can see here — though many experts think they will rise. And that’s leading many Americans to wonder what to do about buying a house now. So we asked pros to give you advice on what to know now if you’re thinking about buying.
Mortgage interest rates are likely to rise
“We are already starting to see interest rates rise and with fears of inflation, this trend can easily continue into 2022. It remains a big question whether a rise in interest rates will bring down pricing given there is such a shortage of housing supply in the country,” says Pierre Debbas, the managing partner of NYC real estate law firm Romer Debbas.
He’s not the only pro who thinks interest rates will go up. Daryl Fairweather, Redfin chief economist, says, “I expect mortgage rates to slowly rise to 3.6% by the end of 2022.” This, he says, is because the Fed is tapering mortgage backed security purchases and we’ll feel the effects in mortgage rates. Dr. Lawrence Yun, the chief economist at the National Association of Realtors (NAR), forecasts the 30-year fixed mortgage rate to increase to 3.5% by the end of 2022. Meanwhile, Realtor.com predicts an average mortgage rate of 3.3% throughout the year, hitting 3.6% by end of year; and Bankrate thinks rates could hit 3.75% at some point during the year. “But there will be ups and downs along the way as concerns about slower economic growth creep in,” says Greg McBride, chief financial analyst at Bankrate.
The fast ascent of housing prices will likely slow
Housing prices rose significantly in 2021 — a nearly 20% rise — and that fast pace will slow, but experts say prices, in general, are still likely to go up. The National Association of Realtors predicts housing prices will climb 5.7% in 2022, while Realtor.com says it’s more like a a 2.9% rise.
To be fair, some markets may actually see prices fall. The CoreLogic Market Risk Indicator, which looks at the health of housing markets across the country, predicts that Springfield, Massachusetts; Worcester, Massachusetts; and Modesto, California, for example, are at the highest risk (50-70% probability) of a decline in home prices over the next 12 months.
“There may be a slight correction in pricing but if anyone is expecting pricing to come down significantly, they’re going to be in for a rude awakening,” says Debbas.
Don’t get caught up in the buying frenzy
Yes, buying has big advantages, including real estate appreciation (it averages roughly 4% a year) and tax perks like mortgage-interest deductions. But it’s not always the right move: The rough rule of thumb is that if you don’t plan on staying in the home or area a long time (longer than say 3-5 years), renting is often the better option. Read our guide on whether to rent or buy here.
Written by Alisa Wolfson. See original article here.
Updated: Dec. 16, 2021 at 1:42 p.m. ET
Many affluent millennials are now ‘lifestyle renting’ instead of buying homes. ‘It’s the best option for now,’ some say — but is it really?
Move over white picket fence, it’s all about the doorman and a sleek gym for an increasing number of monied millennials — or at least that’s what a new study from real estate site RentCafe implies. It finds that the share of millennials who are lifestyle renters — defined as renters with above-average incomes who are using their bigger budgets to rent in amenity-rich, fancier apartments rather than buy a place — is on the rise. This year’s millennial rental applicants are making 10% more than those who moved last year, and 39% of applicants this year had individual incomes above $50,000. “There are individuals who opt to rent because they want to and not because they have to. They typically don’t want to be tied down by home ownership and mortgages. They often look for buildings with amenities such as gyms or for buildings that may be closer to where they work,” explains Michael J. Romer, managing partner of real estate law firm Romer Debbas.
But is renting a nice pad better than buying right now? Mortgage rates are still near historic lows — some 30-year rates are still near 3% and 15-year rates near 2%, as you can see here — and experts say they expect them to rise. But at the same time, housing prices rose nearly 20% year over year, which is giving some pause — though many economists and analysts we spoke to don’t see this as a bubble, and instead think prices will continue to rise, though at a more gradual pace, thanks, in part, to constrained supply issues.
The answer of whether to rent or buy depends a lot on your individual circumstances, pros say. From a high level, the rough rule of thumb is that if you don’t plan on staying in the home or area a long time (longer than say 3-5 years), renting is often the better option. This is in part because when you buy a home, you have to factor in closing costs, a down payment, property taxes and more. This rent vs. buy calculator from NerdWallet can help you figure out whether it makes sense to rent or buy now.
A significant downside of renting is the loss of real estate appreciation, which varies based on location and market conditions, but tends to average 4% over the long term, as well as tax deductions such as mortgage interest, real estate taxes and private mortgage insurance. “Simply put, real estate is an asset when you own it and merely an expense when you rent it,” says Romer.
Romer notes that when looking at the financials of buying, “you’d have to calculate the approximate mortgage interest you would have to pay and the real estate taxes for potential property. Be sure to keep state and local tax deductions (SALT) in mind and always check with your accountant first.” Home ownership also requires maintenance that, when renting, the landlord would do for you.
And, it’s not just a question of renting vs. buying: In recent years, Romer says one could argue that investing in stocks is actually more profitable than investing in real estate.
You may need to rent in order to save up to buy: “How long depends upon how much one is able to set aside. Save up to purchase that home — it’s worth it,” says Romer. And RentCafe researcher Alexandra Ciuntu says: “It comes down to the individual’s ability, financial or otherwise, to take the leap toward homeownership and one’s goals. While previous generations felt the need to cross home buying off their list and associated it with status, millennials are more prone to lifestyle renting as a viable, successful alternative. For some higher-earning renters hoping to become homeowners, lifestyle renting might not make sense, but it’s the best option for now. Renting in close proximity to an important hub can help evaluate the homebuying market and hopefully land the right opportunity to buy. For some, waiting it out in a perfect home buying hunting ground can prove a solution.”
Of course, renting versus buying is about more than just money. Renting “is of particular interest to young people who want to try different locations, property types and trendy amenities. Younger professionals are generally income rich and liquid asset poor,” says Lisa K. Lippman, a real estate broker at Brown Harris Stevens in New York. “Therefore, renting allows them to live life at a standard comparable to their income without plunking down a large down payment for a purchase.“ Adds Romer: “A prime candidate would be someone who works in an urban area and wants to live nearby, but doesn’t have the necessary liquidity to purchase. Another example would be empty nesters who have sold their suburban home and no longer want the responsibility of home ownership. For them, renting can certainly be a lifestyle.”
In the end, it’s a personal choice — and it’s not only about money, but also about how you want to live your life.
Written by Janet Siroto. Source: https://www.realtor.com/news/real-estate-news/how-does-inflation-affect-home-prices/
Inflation is a red-hot topic right now, and for good reason: In October, the annual inflation rate rose to an alarming 6.2%. That’s the highest it’s hit since November 1990, over 30 years ago, and a steep uptick from the manageable 2% that we’ve enjoyed for the past five years.
Translated to your daily life, this means Americans are shelling out more money for just about everything, from gas for your tank to heating bills to groceries and more. Our money simply doesn’t go as far as it used to.
So what’s the impact of inflation on housing?
Not surprisingly, inflation is influencing the real estate market in a big way, too. According to a Stanford University study, residential real estate has historically been an “investment safe-haven” during inflationary periods. Researchers found that during the 1970s (another moment of surging inflation), home prices rose relative to the size of the economy. This was good news for homeowners and real estate investors, since it meant that their home’s rising value helped offset rising prices elsewhere.
If you were shopping for a new home, though, this was a major challenge—and the same may hold true today.
Simply put, inflation is when the prices of goods and services rise, thereby decreasing the purchasing power of the money you have to spend. Right now, several factors are contributing to inflation. First, consider the impact of government aid during the COVID-19 pandemic.
“As the government supported American households and provided [financial assistance], that gave many people more purchasing power,” explains George Ratiu, manager of economic research at Realtor.com®. “But a lot of Americans could work remotely and didn’t need to spend on, say, takeout lunches at the office, commuting and parking, dry cleaning, and other expenses. So companies on the supply side of those goods and services needed to charge more since they had fewer customers.”
As the number of transactions dropped, business owners raised their prices to stay afloat to make ends meet. (This often happens during recessionary times.)
Another factor contributing to inflation today: the supply chain issues occurring around the globe. Manufacturing was disrupted due to the pandemic, as illness and lockdowns slowed business, and there continue to be significant problems with goods getting into ports. (The Los Angeles/Long Beach area is one oft-cited bottleneck, with so many products typically arriving there from Asia.) Trucking those items across America once they arrive has also been challenging since there are fewer people available to drive the 16-wheelers to get goods where they need to go.
“There is worker shortage. Companies are raising wages to address that, but also consequently raising prices,” says Lawrence Yun, chief economist at the National Association of Realtors®. So if a bathroom sink might normally sell for $100, when you have to pay your workers and drivers more, the manufacturer must raise prices to offset that.
Now that you understand why prices are painfully high, let’s consider how that affects home prices. Even before inflation started rising, the housing market has been tight, with prices and rents climbing. Brace yourself, because things are not heading in a more affordable direction anytime soon.
“Inflation exacerbates the housing demand-supply imbalance, which means even higher prices for housing,” explains Lawrence J. White, the Robert Kavesh Professor of Economics at New York University’s Leonard N. Stern School of Business. “People think, ‘I need a hedge against inflation, housing has traditionally been a long-lived, durable asset.’”
The more people jump into the housing market, the greater the demand, the lower the supply, and the higher the prices go. The air is already thin on this front, with home sales and median rents reaching record highs this year, says Ratiu.
White also says there’s a serious zoning construction problem throughout much of the U.S., making the market even tougher for people looking to buy and rent.
“Land use restrictions, whether the size of a lot that a single-family house can go on or for a multifamily rental or condo property, is further restricting supply,” White explains.
There’s no doubt that strong inflation will affect homebuyers’ budgets. The majority of buyers tend to finance a home purchase, which means they need a down payment and then must apply for a mortgage.
“Assuming they have a down payment, the mortgage payment will be a main determinant of what they can afford,” says Ratiu. “Mortgage rates tend to move in tandem with inflation, so mortgage rates will rise. The Fed has been a principal purchaser of mortgage-backed securities, but that will wind down by April 2022, driving rates higher. By late November, Freddie Mac rates went up to 3.10%, meaning that today’s buyers of a median-priced home will spend $160 a month more on their mortgage payment, which is a noticeable impact.”
For home sellers, the current tight market can be a good time to reap a profit—provided that postsale, they can find somewhere affordable to move. If the house you bought for $200,000 is now worth $300,000, that’s terrific. But if you sell and want to stay in the area, can you afford to buy what you want, or has inflation decimated your spending power? It’s an important question to ask.
As inflation eats away at homebuyers’ spending power, many may be wondering: When will things get better?
“My prediction would be most places will see higher prices for housing as we untangle supply chain issues,” says White. “We are also reconciling with trends in consumption going back 50 years. People had been shifting from spending on goods to spending on experiences—going to the gym, dining out, taking a cruise. COVID-19 totally reversed that. Who wants to go to a restaurant or movie during a pandemic?
“But if things shift and we do spend more on services, that will help untangle supply chain issues,” says White. “There will be less demand for goods at bottlenecked ports.”
Once that happens, inflation should abate and allow homebuyers to return to their pre-pandemic budget.
The other big question that will affect the real estate market is where mortgage interest rates go next. A lot of that depends on what steps the Federal Reserve takes.
“The 30-year mortgage rate could rise to 3.7% by the end of next year from the current 3%,” says Yun. As a result, some buyers will no longer qualify for mortgages at higher interest rates. They will have to either take their spend down a notch or sit on the sidelines for a while as the market becomes too pricey. For homebuyers who have extra cash on hand, this will be a good time to jump into the market as they look to hedge against inflation during this moment when money isn’t going as far as it used to.
We now have the Market Snapshot for November! These numbers reflect the real estate activity for single family homes, townhomes, and condos for all of Sonoma County. Scroll down on my page to compare to October!
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