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Rent vs Buy: 2018 Trends

Multiple factors are affecting rent versus buy trends across the nation, including age group, local real estate market conditions, and taxes.

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Age Cohort and Local Markets Are Large Influences

While Millennials, those in their twenties and thirties, continue to rent, the group has also been moving into the home-buying stage. But Millennials are more likely than other groups to have had their earnings impacted during the financial crisis, which coincided with their young adulthood. They also have larger student debt burdens than past generations.

As a result, their real estate buying power is less. While 80% of all Americans say that real estate prices have forced them to look for smaller or less expensive homes, a whopping 92% of Millennials say it.

Rising interest rates are another factor affecting all Americans, but especially Millennials. Thirty-seven percent of Millennials said interest rates are causing them to look for less expensive homes, but just 24% of Baby Boomers indicated that interest rates are a factor.

Pressures on their buying power are also causing Millennials to consider different markets than past generations. Florida, for example, has long had a booming real estate market, with demand for its sun and vibrant economy. But among Millennials, once-popular Florida cities make up roughly 50% of the areas they don’t want to move to.

Instead, they are snapping up real estate in Detroit and its suburbs. The once hard-hit Detroit area is popular because of its relatively low real estate prices. The Detroit Free Pressdescribes area housing activity as “frenetic” due to this hot demand and relatively low inventory.

But Baby Boomers should not be left out of the equation. While many Baby Boomers want to age in place in their single-family homes, downsizing is also a popular trend. Many Boomers are choosing to purchase multifamily developments such as condominiums to downsize in, emphasizing the convenience and amenities.

Although the effect of the financial crisis on Baby Boomers is not written about as frequently as the drag exerted on Millennials, it should be noted that it did change the rent versus buy equation for a number of Boomers. Post 2008, they are more likely to rent single-family homes than to buy them.

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Overall Trends

According to the Beracha, Hardin & Johnson Buy Versus Rent (BH&J) Index, housing prices have been climbing for the most part in the 6 years since 2012, but will be slowing down going forward. There are 23 discrete metropolitan areas in the Index. Thirteen, according to the Index are slightly or moderately in buy territory and 10 are in slightly or moderately rent territory.

Do New Tax Laws Change the Picture?

One economic advantage of purchasing a home has long been a tax deduction on mortgage interest and state and local property taxes. Although the new tax laws signed by President Donald J. Trump keep both, they have new caps. Interest is now limited to what is paid on mortgages of $750,000 worth of debt, and property tax deductions are capped at $10,000.

These caps, combined with an increase in the standard deduction, may mean that rent remains financially at least as attractive for a larger number of people, especially as incomes climb. For a consumer making $75,000 annually, for example, buying would have become a better option at a rental price of $894 monthly last year. But under the new tax law, buying becomes a better option at a rental price greater than $1,017.

It remains to be seen what impact rising real estate trends, demographics, rising interest rates, and taxation will have on mortgage lenders. Their combined impact may make renting a more attractive option, which does not benefit lenders. However, interest and property tax deductions still combine with home equity potential to make home ownership a highly attractive option.

While lenders are likely to benefit from in-demand markets throughout the country, we could be facing inflation and additional interest rate increases in the coming months, both of which could impact lending and profits. Lenders can minimize the risk of losses by considering selling loans and buying loans in different asset classes. Partnering with a reputable asset management company gives lenders the opportunity to connect with mortgage note buyers for loan portfolio optimization.