Higher home prices mean fatter fees for agents and brokers. But too-high home prices can also mean fewer fees as buyers are scared from participating in the ownership market.
This is the situation many real estate professionals are contending with at the dawn of 2014. In the wake of rampant (and unsustainable) home price escalation in 2013, it’s now cheaper to rent than own in many areas, according to a new study by RealtyTrac.
Good news for renters, but less cheerful news for those hoping to buy in 2014.
In California, it’s less costly to rent a median-priced three-bedroom home than own a comparable property across the state. This rent-friendly environment specifically includes:
- Los Angeles;
- Santa Clara;
- Alameda; and
- San Francisco counties.
In the feverish climate of the Millennium Boom, this buy-versus-rent analysis hardly mattered to homebuyers. They were told by overzealous peddlers of the American Dream that buying a home was a sure investment that would ultimately pay off. “Safe as houses” was the bandied about phrase. Government housing policies merely added to the hype surrounding homeownership. This farce (perpetuated by lenders and real estate professionals alike) allowed home prices to diverge well above real estate fundamentals.
However, today’s homebuyers are savvier and thriftier by necessity due to more stringent financing requirements. Expect most of your homebuyer clients to have done the math already when it comes to the cost-savings analysis for buying versus renting their current or desired home. Therefore, the owner-occupant homebuyer might be harder to find as we start 2014, as they wait for home prices to drop back to a reasonable level.
And if they haven’t done the math, be prepared to facilitate the creation of a cost analysis sheet. Use this to demonstrate where they will find the most long-term savings. [See first Tuesday From 306: Property Expense Report]
Is today’s situation the beginning of the new normal in California? Hardly.
Today’s upside-down situation was caused by the extremely elevated speculator presence in 2013, now diminishing in 2014. As speculators continue to exit the housing market with greater urgency, expect home prices to dip, offsetting the balance of this rent-or-buy equation. This has already begun in high-tier home sales and the effect is likely taking hold in mid- and low-tier home sales in the first months of 2014.
If the news that renting may be cheaper than buying has put off your homebuyer clients, remind them of the long-term savings from buying a home today rather than tomorrow. Specifically:
- mortgage rates will rise for the next two-to-three decades beginning in 2015;
- low competition from other end user homebuyers will continue through 2014; and
- over-priced rents will continue to chip away at money that would otherwise be better put toward a down payment on a home.