Pressured Renters Flock Into Tight Home Market

"Rising rents are one of the main drivers in the recent bout of inflation. They are also spurring many renters to try to buy a home as quickly as possible.

Average monthly rents listed in the U.S. jumped more than 14% year over year in December, climbing to $1,877, according to data from Redfin. In many major cities, including Austin, Texas, and Miami, rents increased by more than 30%.

Economists still recommend buying a home as a way to stave off inflation and build wealth, though it is hardly easy. Buyers are already contending with rising home prices, decreased inventory, bidding wars and the prospect of higher mortgage rates.

Many renters are staying on the hunt nevertheless. They are redoing the math on renting after seeing their monthly payments go up and rushing to get a home -- any home -- to outrun coming rises in mortgage rates and future rent increases.

Financial advisers and economists generally agree with this plan. But they are concerned that some clients are panicking and could harm their finances in the long term.

"Come late December, we started worrying," said Katie Quinn, of her search for a home in the Sacramento, Calif., area. "Like, 'OK, we have to find something quick and lock in a good interest rate before it starts to increase.'"

The pressure on renters is coming from many directions.

Higher rents are eating into buyers' down-payment savings, while rising home prices mean they need to come up with a bigger down payment to compete with other buyers.

As of January 2022, the median home price increased to $357,300, up 14% year over year, according to Redfin.

"A lot of people couldn't find a way to get into a home last year," said Daryl Fairweather, chief economist at Redfin. "A lot of people were thinking 'I'll rent instead,' and that got rents up."

Mortgages are getting more expensive as well.

Last week, the Federal Reserve signaled it would begin raising interest rates in March as part of its plan to bring down inflation. The average rate on a 30-year fixed-rate mortgage is now about 3.55%, still low by historical standards but up nearly 0.8 percentage point year over year, according to Freddie Mac.

Brooke Baenen, a Green Bay, Wis., area real-estate agent, said one of her clients -- a first-time buyer in her 40s -- felt moved to action by the rent increases. This client had been a lifelong renter, but when her rent increased -- first by $50 a month, then by $200 a month -- she grew interested in buying a home.

Ms. Baenen said she has talked with many people in similar positions. In her area, which has historically been affordable, she is seeing people living in small-city apartments but paying big-city prices.

Financial advisers worry that the prospect of rising home prices and mortgage rates may lead some renters to panic and overpay for properties, said Malik Lee, founder and managing principal at Felton & Peel Wealth Management.

When purchasing a home, a home buyer must put down a down payment -- which can fall anywhere from zero, for loans guaranteed by the Department of Veterans Affairs, to at least 20% for many standard mortgages. Closing costs typically average 2% to 5% of the loan amount, according to Redfin.

From there, a buyer has to calculate the monthly total.

Mr. Lee points to mortgage calculators that allow people to see the impact private mortgage insurance, homeowner association fees and other costs will have on their monthly payment. He says a buyer should be wary of spending more than 25% of income on these monthly items.

The impact of rising mortgage rates depends on a buyer's total mortgage. For example, a buyer who purchases a $1 million home and puts down 20% is left with an $800,000 mortgage.

If the 30-year rate on that mortgage is 2.75%, they would pay roughly $3,200 every month. If the rate increased to 3.5%, their payments would be closer to $3,600.

"I'm a big stickler on making sure when you get into the home, you don't deplete reserves just to get into the home," Mr. Lee said.

Once a buyer has done that math, next is comparing a potential mortgage payment with current rent payments.

Some people may find mortgage payments may cost them as much -- or less -- than increased rent, said Audrey Chaney, a real-estate agent at Realty ONE Group Complete and ACRE & CO in Sacramento.

"If you're spending $2,400 a month in rent, that could be equity in a home. If you do that for two years, it's almost $50,000," she said." [1]

1. Pressured Renters Flock Into Tight Home Market
Carpenter, Julia. Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 03 Feb 2022: A.12.