To Own or To Rent in Overvalued Markets?

Feb 5, 2016

Home prices are rising, which is good news for homeowners (but not so much for those hoping to buy), especially in popular markets such as San Francisco and Denver.

According to the CoreLogic Home Price Index Report, which shows the changes in home prices year-over-year and month-over-month, home prices across the country rose by 6.4 percent in September 2015 from September 2014. Prices will continue to increase by 4.7 percent on a year-over-year basis from September 2015 to September 2016, according to CoreLogic.

In the second quarter of 2015, 14 of the top 100 markets in the country were overvalued—a twofold increase from the previous quarter, according to CoreLogic research.

In October, the S&P/Case-Shiller Home Prices Indices also reported a rise in home prices across the country, with San Francisco, Denver, and Portland registering an increase of 10.9 percent.

“Real (inflation-adjusted) house prices continue to grow ahead of long-term national averages as demand picks up faster supply,” Doug Duncan, senior vice president and chief economist at Fannie Mae, told NerdWallet. One big driver behind the increase in home prices is “the slow pace of supply growth in new homes,” adds Duncan.

Anand Nallathambi, president and CEO of CoreLogic, shared Duncan’s sentiments.

“More has to be done to expand inventories if we are going to address the emerging affordability crisis, especially in hot markets like California and Colorado,” says Nallathambi.

Renting vs. Buying

For those markets that are overvalued, it may be more affordable to rent than to own, especially in a few markets in Texas where it is easier for developers to build new supply, according to Tatyana Zahalak, an economist with Fannie Mae.

“Dallas and Houston tend to have less-expensive rentals because the new supply coming online pushes prices down for existing apartments if they want to compete,” says Zahalak.

While there is an estimated 500,000 new apartment rental units under construction in the U.S., this new supply is not evenly distributed, according to a recent study from Fannie Mae’s Multifamily Economics and Market Research Group (MRG). Cities with nearly 20,000 units of new apartments under way include New York, Seattle, Denver, and Atlanta.

“Rent growth should moderate in some cities because new apartments coming online will push rents down for existing apartments as older apartments need lower rents to compete,” says Zahalak.

Go South (East and West), Young Man

Smaller cities in the Southeast and Southwest have the cultural amenities and favorable housing costs (both for renting and buying) for young people, says Zahalak.

“Memphis is a smaller city with a vibrant music scene where the average rent is less than $600 a month,” says Zahalak. “San Antonio has the popular River Walk concert series, and average rents are just above $800,” she adds.

Cities in the Southeast are also attractive, as many of them have less-expensive homes available for purchase. This, in turn, can stymie rent growth as potential renters turn to homeownership, says Zahalak.

But Is Renting Really ‘Cheaper’?

Those who have decided to rent this year should take note: Rental prices across the country are expected to grow by 3.5 percent in 2016, according to a report from RealtyTrac.com. In fact, it will be more affordable to own a home than renting one in 58 percent of U.S. housing markets, according to the report.

In markets where there is strong income growth, buying a home with an unaffordable mortgage may seem inadvisable on the surface. But Trulia says these mortgages become affordable within a few years as wages and income are likely to grow over time. For instance, in markets such as Silver Spring, MD, and Madison, WI, mortgage payments are initially unaffordable, but become affordable in less than two years, per Trulia data.

Renters may be stuck “between a rock and a hard place” when choosing between buying and renting, says Daren Blomquist, vice president at RealtyTrac, in a statement.

But 2016 may be the opportune time, he says, for some renters to “take the plunge into homeownership before rising prices and possibly rising interest rates make it increasingly tougher to afford to buy a home.”

 

Estimates, forecasts and other views expressed in this article should not be construed as indicating Fannie Mae’s expected results, are based on a number of assumptions and may change without notice. How this information affects Fannie Mae will depend on many factors. Neither Fannie Mae nor its Economic & Strategic Research (ESR) Group guarantees that the information in this article is accurate, current or suitable for any particular purpose. Changes in the assumptions or underlying information could produce materially different results. The ESR group’s views expressed in this article speak only as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

 

The post To Own or To Rent in Overvalued Markets? appeared first on Fannie Mae - The Home Story.

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