For four years now, the housing market has defied all logic.
The global pandemic did not cause prices to collapse, but rather pushed them to new heights. Last year, mortgage rates hit a 23-year high, and sales declined. Despite this, housing prices have stubbornly continued to rise, creating a housing market that has been unaffordable for generations.
This year brings a new development to the lot: There are more apartments under construction than at any time in half a century, offering renters more new apartments than they’ve seen in decades.
So, while buying a home is still an infuriating experience, characterized by rising prices, high interest rates and low inventory, renting an apartment is getting easier. This means that unless you plan to live in a home for the next decade or so, now may not be the best time to buy it.
“This is the worst time to buy a home,” said Christopher Mayer, a professor of real estate at Columbia Business School.
Yes, mortgage interest rates are down from their October peak of around 8%, and inventory is rising as sellers return to the market. But the overall picture has not changed in any way, and it likely will not change anytime soon.
Most economists do not expect mortgage rates to fall much further this year. The average 30-year fixed-rate mortgage was 6.6 percent in the third week of January, according to Freddie Mac. While optimists like Selma Hipp, chief economist at CoreLogic, believe interest rates could fall below 6% by the end of the year, pessimists like Skyler Olsen, chief economist at Zillow, believe they could approach 7% again.
Headwinds are no fun. In December, the number of new listings was up 2 percent from a year earlier, but still down about 15 percent from pre-pandemic levels, according to Zillow. As for prices, economists expect them to stabilize more or less this year. Redfin expects it to decline by 1 percent. Freddie Mac, it will increase by only 2.5 percent, half the rate of 2023.
All of this means that anyone buying a home today is likely paying top dollar, at a high borrowing cost, for an asset that may already have peaked.
As Mr. Mayer said, “you’re effectively buying a luxury item, and you’re not paying the same rate of return” as other investments.
Tenant year?
However, the rental market looks a little different, at least this year.
Not since 1973 has the United States seen so many apartments — about 1 million nationwide — under construction at one time. More than half of them will be available this year, almost all of them for rentals.
Many of these developments were started during the pandemic, when developers bet on a market with rising rents as people uprooted their lives and moved. But building a multifamily building takes a long time, and these buildings are entering a changing landscape. Tenants, who have reached their financial limits, no longer sign many leases, leading to increased vacancies.
Asking rents were essentially flat last year across the country, falling about 1 percent, to an average of $1,379 per month, according to Apartment List. In New York City, the average asking rent — $3,500 per month — rose less than 3 percent in November 2023 from a year earlier, marking the smallest increase since August 2021, according to StreetEasy.
It’s still a time of crushing housing costs, with rents 19 percent higher than before the pandemic, a period that “resets the market to a whole new price level,” said Igor Popov, chief economist at Apartment List.
Housing and shelter costs were among the biggest drivers of inflation in December 2023, According to the Bureau of Labor and Statistics. Last year, the typical renter was cost-burdened, spending more than 30 percent of their income on rent.
“Tenants need some relief,” said Bess Friedman, CEO of Brown Harris Stevens. “People can’t afford these crazy prices. They have to have a home.”
New housing may at least prevent rents from increasing significantly. Tenants should expect deals, with landlords offering months of free rent, gym access or parking. (In December 2023, 33 percent of rental listings on Zillow included concessions, up from 27 percent in December 2022.)
“For renters, with inventory rising, they will finally feel more able to negotiate rents and concessions” in New York City, said Kenny Lee, an economist at StreetEasy.
While these new developments are concentrated in the Sunbelt and Midwest, they could be seen elsewhere as well, including suburbs and rural communities, said Robert Dietz, chief economist for the National Association of Home Builders. “This is really happening everywhere,” he said.
But the party won’t last long. High interest rates have spooked developers across the country, drying up construction pipelines, and starts on new multifamily developments are expected to drop 20 percent in 2024, according to the National Association of Home Builders. In New York, where the property tax break ended, monthly applications for new establishments, an important marker for new construction, fell 78% in 2023 compared to the previous year, according to the Real Estate Board of New York.
“I always think of it in terms of drought,” Mr. Popov said. “You may have one rainy season that helps, but you still suffer from drought.”
“Mathematics doesn’t make sense”
Last year, many potential sellers stayed put, unwilling to trade pandemic-era mortgage rates for much higher prices on their next home. To make matters worse, the country is short between 1.5 million and 6.5 million new homes, depending on who you ask, because developers haven’t built enough housing since the foreclosure crisis to keep up with population growth.
The result: fewer homes were sold in 2023 than at any time since 2014, according to CoreLogic — but not because of a lack of demand. Despite the spike in interest rates, people still wanted to buy homes, and many found themselves navigating a confusing world of bidding wars because there were so few homes available to purchase.
By October 2023, home prices had risen 45% since the start of the pandemic, according to the Case-Shiller Home Price Index. Combine this price growth with the increase in borrowing costs, and there is now less housing than at any time since 1984, according to a November report from data firm Intercontinental Exchange. In the third quarter of 2023, the typical costs of owning a home — mortgage, insurance and property taxes — exceeded $2,000 per month for the first time in history, eating up nearly 35% of the median wage, according to ATTOM, a data analytics firm. .
If you think of buying a home as a decision based solely on dollars and cents, the answer isn’t clear — especially for someone who might move again in the next few years.
“In some ways, the calculations don’t make sense,” said Lisa Sturtevant, chief economist at Bright MLS, a multiple listing service for the Mid-Atlantic region.
The math certainly doesn’t make sense to anyone who already owns a home with a 3 percent mortgage interest rate. Moving from one home to another of approximately the same value will cost thousands of dollars in higher interest payments over the years.
First-time buyers also face difficult calculations, as rents are currently low compared to mortgage payments. Buy a $400,000 home today, with an $80,000 down payment and a 30-year mortgage at 6.6%, and interest payments alone (not including taxes or maintenance) would cost nearly $20,000 in the first year.
But suppose you find an apartment with an average rent — $1,379 per month? A year of lease will cost you $16,550.
Put that down payment of $80,000 into a mutual fund or stock market, and you’ll likely get a higher rate of return on your investment.
“If I invested money in a house today, given how much prices have risen, I would really say I expect home prices to go up a lot,” Mayer said. “I don’t think that’s a realistic expectation.”
Eyes on the forever home
But people don’t buy homes the same way they buy stocks.
A home isn’t just an investment – it’s a source of stability and a place to live your life, and perhaps raise children. There are significant tax advantages as well, especially if you own the home for many years.
One of Mr. Meyer’s former students was moving to the Bay Area for a new job and asked for advice. Given the high housing prices in the area, the student wanted to know if purchasing made sense. The rate of return on her investment didn’t seem right in the short term, but she had other factors to consider — her kids would be going to school and she’d find a home in a neighborhood she liked, with an easy commute.
In other words, she had to think about her life. Mr. Mayer advised her to buy.
Other buyers and sellers appear to be making similar calculations. During the second week of January, mortgage applications for home purchases rose 9 percent from the previous week, according to the Mortgage Bankers Association.
As Dr. Sturtevant of Bright MLS points out, “It’s not always about the math.”
She continued, “For some homeowners, the math may seem difficult, but other factors come into play: Maybe they need another bedroom for a growing family, or they need to move to be near an elderly parent or change jobs.”
After 18 straight months of high interest rates, buyers and sellers may decide to make a change anyway. “I think 2024 is a ‘life happens’ year,” she said.
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