A new headline pops up every day proclaiming the popularity of renting in the US. This is no surprise in a country where 93 million people rent their homes and the homeownership rate in 2012 fell to 65.1% – its eighth straight year of decline. The Census estimates that about 70% of moves are done by renters and renters are handing over an ever-higher percentage of their monthly income to landlords as rents rise around the country.
There is another trend, however, that most renters haven’t picked up on yet. While Main Street has been hot to rent, Wall Street has been hot to buy. Institutional investors (made up of hedge funds and large asset management firms) spent the last 18 months buying up over $20 billion worth of homes, betting that home values will appreciate. These investors are then renting the properties to Americans who are paying high rents to live there. Renters are paying the carrying cost (mortgage, interest, and maintenance payments) of these homes. Wall Street thinks that homes will rise in value enough for the investors to sell and make a hefty profit.
So why aren’t more people following the smart money?People simply don’t realize that they can afford to buy a home. Living in a metropolitan area, it is often hard to imagine buying an apartment that is both more expensive than our parents’ and a fraction of the size. The minimum starting point in New York City (roughly $400,000) is double the median home price in the US ($199,500 in October 2013). But the average New Yorker makes nearly 2.5x the salary of the average American.
I think that the reason most people don’t consider purchasing is the misconception that the starting point for an apartment is seven figures. Don’t let the outrageous outliers and newly constructed $3,000+ per square foot condosfeed the misperception that a reasonable price for a 1 bedroom in a co-op costs well in excess of $1mm.
In fact, over 45% of one-bedrooms in NYC co-ops can be purchased for $500,000 to $800,000. Choose well and your monthly costs will be lower than the equivalent rental.
Let’s assume you purchase a $500,000 apartment (a quick search shows plenty available). With a 20% downpayment and 4.25% interest rate, the monthly payment on your $400,000 mortgage will be $1,967. Adding a $1,000 monthly maintenance charge, the total cost to own your half-million dollar apartment is $3,000 per month, before any tax deductions.
Was buying always so affordable? Why haven’t our parents or professors enlightened us?
What many do not realize is how lucky we are to be living in 2013, when interest rates are at historic lows. According to Trulia, buying will be cheaper than renting as long as interest rates remain below 10.5%. For those paying attention, current rates are around 4.25%.
The last time rates fell this low was in the 1940’s. FDR was president, the US was still facing a depression, and rates were kept low as the US was borrowing massively to fund World War II. Econ majors understand that these low rates are part of the Federal Reserve’s effort to encourage investment and stimulate a slowing economy. Although the speed at which rates change does affect pricing, – in the long-run there is no correlation between rates and prices, says Douglas Duncan, chief economist of Fannie Mae.
We may look back on this era as the best time in history to buy a home. Low rates and ever-rising rents present an enormous opportunity for New Yorkers. But suburbanites can also join in on this trend. According to a study from the Joint Center for Housing Studies at Harvard, the mortgage payment on a median-priced home in 2012 was just $644, the lowest level since records began in 1972 and half of the $1,266 peak in 2006.
Smart money is taking advantage of the divergence of low interest rates and home prices by buying homes and awaiting the inevitable uptick in home prices.
How long will it take before Main Street joins the trend?
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