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Should Millennials buy now or continue to rent?

Should Millennials buy now or continue to rent?

Now a reasonable time to buy a house, given rents seem to be on the upswing?

Why ask me? Believe it or not before the Report, I worked for a living. As a developer/GC for 25 years, I built over 1,000 homes & bought the properties on which they were constructed.

Are we in a housing bubble? Basically yes. A decade of artificially low-interest rates (made possible by the Federales, QE2 & bond-buying sprees) has allowed buyers to bid up the price of homes since the monthly cost to own was almost zero. Low rates made for cheap ownership. Unfortunately, the party’s over. Rates may come down a bit, but not to where they were 24 months ago. So we have a bubble that’s primed to deflate or even pop.

The basics: People buy homes knowing their monthly payments (mortgage, taxes, maintenance) will be higher than renting. Sometimes the “maintenance” ends up being an expensive nightmare. The owners are counting on the appreciation of their home to offset all of this. They also like the fact that the mortgage payments will not go up each year. Many also want to put down roots for raising kids in a place with good school districts.

Sadly, the average cost/month to own a home has doubled since the pandemic*. This is the result of higher home prices and 3X higher mortgage rates. The premium to own vs rent is the highest it’s been in 25 years. On average it’s twice the cost/month to own. BTW, Rents have gone up, but not nearly as much.

Here’s the worst part. Home prices can drop like a rock (like in 2008 when 25% of American’s mortgages exceeded the value of their home). The Case-Shiller home price index dropped by over 18% that year! Obviously, the impact varied greatly by location.

Imagine you’ve lost your home equity and still need to keep paying these doubly high costs. That great “home appreciation” just went by bye-bye. Maybe you stop paying the mortgage to move somewhere else and rent at half the price. Next, your home is foreclosed on and perhaps you can’t apply for a mortgage in the future…your credit rating is toast.

What’s the chance of home prices going down? Pretty good. One in five US homes is now owned by investors. Their rental tenants pay their mortgage & other costs. Unlike owner-occupants, they can’t obtain long-term mortgage financing. Rather, they have short-term loans (5-7 years) a substantial portion of which come due in the next 36 months. These loans (most at 2%+ rates) will renew at 7.5% rates. Those higher interest rates cause the homes to be a financial disaster. The rents won’t cover the nut. It’s time to unload these properties at a fire sale or lose through foreclosure.

It only takes a small number of these distressed home sales to tank an entire market. Do I think this is likely? It’s not unlikely.

Is there a way to take advantage? Wait if you can. Save your money so if the market tanks you can buy opportunistically. The odds of prices dropping significantly outweigh the probability of they’re going up.

Can a Realtor advise you? These guys are quitting the business in droves. They can’t make a living because nobody’s buying or selling. They’re desperate to get folks like you to buy else they don’t eat. They’re also persuasive. Careful!

*Home price/Int rate data.

  • Median sales price for homes sold in U.S. $329,000 (Jan 2020) vs $479,000 (Dec 2022). Avg 30 yr mortgage rate increased from 2.66% to 7.5% & the avg attendant monthly mortgage went from $1,062 to $2,679 during that time period (assuming 20% down). RE tax component varies by state. Source Federal Reserve Bank of St. Louis.

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