Buying Beats Renting After Just Two Years in Half of Metro Areas
Prospective homeowners face a pleasing condition: In half of U.S. metropolitan areas, buying now beats renting after a mere two years.
“Rents keep rising, and mortgage rates remain very low, which is helping to skew the rent vs. buy decision toward buying for those who can afford it,” said Stan Humphries, chief economist forZillow.com, the housing and mortgage firm behind a rent-versus-own study,
Two years is a surprisingly short time to make a home purchase pay off. For many years, the rule of thumb was that you must own a home for four or five years to break even . It takes that long for the home’s rising value to offset the various costs, including title insurance and realtor’s commission, incurred in the purchase and sale. Renting makes more sense for anyone who does not expect to stay in the home beyond the break-even period.
But prospective buyers benefit from the lower prices. And low mortgage rates allow them to keep their monthly costs down. At the same time, high demand has pushed rents up very fast in many communities. The higher the rent, the sooner owning pays off. Finally, low-interest earnings on safe savings such as bank accounts reduce the gains renters can enjoy on cash that is saved instead of being put into a down payment on a home.
“Among the 35 largest metro areas analyzed by Zillow in the first quarter, those with the shortest breakeven horizon were Riverside (less than 1 year), Orlando (1 year), Tampa (1.1 years) and Miami-Fort Lauderdale (1.2 years),” Zillow said, referring to locations in California and Florida. “Large metros with the longest breakeven horizon included Washington, D.C. (4.2 years), Boston (4 years), Phoenix (3.3 years), San Diego (3.2 years), Minneapolis and Baltimore (both 3.1 years).”
Zillow cautions that break-even periods can vary considerably within any given city.
Mortgage backed securities (MBS) gained +46 basis points (BPS) from last Friday’s close which caused 30 year fixed mortgage rates to move lower from the prior week. The market saw the lowest rates on Friday and the highest rates on Tuesday.
As a refresher for you – when the economy and labor market expands, long term bonds suffer which is why you see interest rates rise when you see strong economic growth. And that is perfectly natural. You can’t have a growing economy AND low rates at the same time under normal circumstances. But that is exactly what we have right now. Last week’s economic data was very, very strong.
On the housing front, Pending Home Sales were better than expected (+3.4% vs estimates of +1.0%), and the Case-Shiller Home Price Index showed a 12.9% gain in home prices over the past year. On the labor front, ADP Private Payrolls were better than expected (220K vs estimates for 210K) and the Non-Farm Payrolls was much stronger than market forecasts (288K vs estimates for 210K) plus the past two months were revised upward. The Unemployment Rate dropped to 6.3% but this was largely due to the participation rate dropping as close to 1 million people said that they were not looking for work any longer.
On the manufacturing front, Chicago PMI was very robust (63.0 vs est of 56.7), and ISM Manufacturing was hot with a reading of 54.9 (vs estimates of 54.3). Our first look at the 1st QTR GDP was disappointing but this number will be revised two more times and the market is largely discounting the report due to the horrible weather that we had during that period.
The Federal Reserve Open Market Committee voted to reduce their monthly Treasury and Agency mortgage backed securities further..so that means less demand and less support for long term bonds.
So….all of the above makes a wonderful text-book case for a huge sell off in bonds and therefore a big run up in rates. But that is not what happened. Why?
This is because of all of the headlines out of the Ukraine/Russia conflict. Headlines of pro-Russian “civilian” forces capturing administrative buildings, taking hostages, shooting down helicopters and our weak sanctions against Russia are doing nothing to deter them. This has foreign money flocking to U.S. bonds which is driving up demand and therefore…..driving down interest rates.
What to Watch Out For This Week:
Date Time (ET) Economic Release Actual Market Expects Prior 5-May 10:00 AM ISM Services – 54 53.1 6-May 8:30 AM Trade Balance – -$42.5B -$42.3B 7-May 7:00 AM MBA Mortgage Index – NA NA 7-May 8:30 AM Productivity-Prel – -1.20% 1.80% 7-May 8:30 AM Unit Labor Costs – 2.50% -0.10% 7-May 10:30 AM Crude Inventories – NA 1.698M 7-May 3:00 PM Consumer Credit – $16.1B $16.5B 8-May 8:30 AM Initial Claims – 325K 344K 8-May 8:30 AM Continuing Claims – 2750K 2771K 8-May 10:30 AM Natural Gas Inventories – NA 82 bcf 9-May 10:00 AM Wholesale Inventories – 1.00% 0.50% 9-May 10:00 AM JOLTS – Job Openings – NA 4.173M
I will be watching these reports closely for you and let you know if there are any big surprises: It is virtually impossible for you to keep track of what is going on with the economy and other events that can impact the housing and mortgage markets. Just leave it to me, I monitor the live trading of Mortgage Backed Securities which are the only thing government and conventional mortgage rates are based upon.