The housing market has defied logic for four years now.
A global pandemic did not cause prices to collapse, but rather caused them to rise to new heights. Last year, mortgage rates hit a 23-year high and sales plummeted. Yet real estate prices stubbornly continued to rise, creating the most unaffordable real estate market in generations.
This year offers a new twist: More apartments are under construction than at any time in half a century, giving renters more new housing than in decades.
While buying a home continues to be a hassle-filled experience marked by high prices, high interest rates and low inventory, renting an apartment is becoming increasingly easier. This means that unless you plan to live in a home for the next ten years, now may not be the best time to buy.
“This is about the worst time to buy a home,” said Christopher Mayer, a real estate professor at Columbia Business School.
Yes, mortgage rates have fallen slightly from their October peak of nearly 8 percent, and inventory has increased as sellers push back into the market. But nothing significant has changed in the overall picture – and that probably won't change in the foreseeable future.
Most economists don't expect mortgage rates to fall any further this year. According to Freddie Mac, the average 30-year fixed-rate mortgage was 6.6 percent in the third week of January. And while optimists like Selma Hepp, chief economist at CoreLogic, believe interest rates could fall below 6 percent by the end of the year, pessimists like Skylar Olsen, chief economist at Zillow, believe they could get closer to 7 percent again.
The headwind is not pleasant. According to Zillow, new listings rose 2 percent in December compared to a year ago, but were still nearly 15 percent below pre-pandemic levels. As for prices, economists expect them to more or less level off this year. Redfin forecasts a 1 percent decline; Freddie Mac that they will only rise by 2.5 percent, half as much as in 2023.
All of this means that anyone buying a home today will likely be paying top dollar at high borrowing costs for an asset that may already be at its peak.
As Mr. Mayer put it, “you're effectively buying a luxury good, and it won't provide the same return” as other investments.
The tenant's year?
However, the rental market looks a little different, at least for this year.
Not since 1973 have so many homes been built simultaneously in the United States – about a million nationwide. More than half will be available this year and almost all are rented.
The groundwork for many of these developments fell during the pandemic, as developers bet on a market with rising rents as people uprooted their lives and moved. However, building an apartment building takes time, and these buildings face a changing landscape. Tenants who are reaching their financial limits are no longer signing as many rental agreements, which leads to an increase in vacancies.
According to Apartment List, asking rents remained essentially flat nationwide last year, falling nearly 1 percent to an average of $1,379 per month. In New York City, the median asking rent — $3,500 per month — rose less than 3 percent in November 2023 compared to a year ago, marking the lowest increase since August 2021, according to StreetEasy.
But it's still a time when housing costs are falling, with rents 19 percent higher than before the pandemic, a time that has “taken the market to a whole new price level,” said Igor Popov, Apartment's chief economist Cunning.
According to the Bureau of Labor and Statistics, housing and shelter costs were among the biggest drivers of inflation in December 2023. And last year, the typical renter suffered a cost burden, spending more than 30 percent of their income on rent.
“Renters need some relief,” said Bess Freedman, executive director of Brown Harris Stevens. “People can’t pay these crazy prices. They need to have a home.”
The new apartments could at least prevent rents from rising sharply. Tenants should expect deals where landlords offer months of free rent, gym access or parking. (As of December 2023, 33 percent of Zillow rental listings included concessions, up from 27 percent in December 2022.)
“Tenants will finally feel more empowered to negotiate rents and concessions as inventory increases,” said Kenny Lee, a StreetEasy economist.
While these new developments are concentrated in the Sunbelt and the Midwest, they are also being seen in other places, including exurban and rural communities, said Robert Dietz, chief economist for the National Association of Home Builders. “It’s really happening everywhere,” he said.
But the party won't last long. High interest rates have spooked developers across the country and dried up the construction pipeline, and new multifamily housing starts are expected to fall 20 percent in 2024, according to the National Association of Home Builders. In New York, where a property tax exemption was expiring, monthly filings for new foundations, a critical indicator for new construction, had already fallen 78 percent in 2023 compared to the previous year, according to the Real Estate Board of New York.
“I always think about a drought,” Mr. Popov said. “Maybe there’s a rainy season that helps, but you’re still in a drought.”
“The math doesn’t make sense.”
Last year, many would-be sellers stalled because they were unwilling to trade pandemic-era mortgage rates for much higher rates on their next home. Making matters worse, the country is facing a shortage of 1.5 million to 6.5 million new homes, depending on who you ask, because developers haven't built nearly enough homes to keep up with the growing population since the foreclosure crisis.
The result: According to CoreLogic, fewer homes were sold in 2023 than at any time since 2014 – but not because of a lack of demand. Despite skyrocketing interest rates, people still wanted to buy homes, and many had to contend with a confusing world of bidding wars because there were so few homes to buy.
As of October 2023, home prices had risen 45 percent since the start of the pandemic, according to the Case-Shiller Home Price Index. Combining this price increase with the rise in borrowing costs, housing is now more unaffordable 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, property taxes — exceeded $2,000 per month for the first time in history and consumed nearly 35 percent of the average wage, according to ATTOM, a data analytics firm.
If you view buying a home as a decision based solely on dollars and cents, the answer isn't clear-cut—especially for anyone who might be moving again in the next few years.
“In some ways the math doesn’t make sense,” said Lisa Sturtevant, chief economist at Bright MLS, a multiple listing service for the Mid-Atlantic region.
For anyone who already owns a home with a mortgage interest rate of 3 percent, the math certainly doesn't make sense. If you move from one home to another that is about the same value, it will cost thousands of dollars in higher interest payments over the years.
First-time buyers also face a difficult calculation 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 an interest rate of 6.6 percent. Interest payments alone (excluding taxes and maintenance) will cost almost $20,000 in the first year.
But let's say you find an apartment at the average rental price – $1,379 per month? A year's rental will cost you $16,550.
Put that $80,000 down payment into a mutual fund or stock market, and you'll likely get a higher return on your investment.
“If I invest the money in a house today, given the high prices, I assume that real estate prices will rise sharply,” said Mr. Mayer. “I don’t think that’s a realistic expectation.”
Eyes on the Forever Home
But people don't buy houses 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 also significant tax benefits, especially if you own the home for many years.
A former student of Mr. Mayer's was moving to the Bay Area for a new job and asked for advice. Given the exorbitant real estate prices in the area, the student wanted to know whether the purchase made sense. The return on her investment didn't look favorable in the short term, but she had to consider other factors – where her children would go to school and finding a home in a neighborhood she liked with a manageable commute.
In other words, she had to think about her life. Mr. Mayer advised her to buy it.
Other buyers and sellers seem to be making a similar calculation. According to the Mortgage Bankers Association, mortgage applications for home purchases increased 9 percent in the second week of January compared to the previous week.
Like Dr. Sturtevant of Bright MLS emphasized, “It’s not always about the math.”
“For some homeowners, the math may seem difficult,” she continued, but there are other factors at play: Maybe they need a different bedroom for a growing family, “or they need to move to be near an aging parent or to change her job.” ”
After 18 solid months of high interest rates, buyers and sellers could still decide to make a change, she said: “I think 2024 is the year of 'life happens.'
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