Sky-high prices, today’s mortgage rates, property taxes on those sky-high prices, and spiking homeowners’ insurance costs create a peculiar situation that more and more people are taking advantage of.
By Wolf Richter for WOLF STREET.
The share of people who said that they would rent rather than buy a home if they were to move spiked to 36%, an all-time high in the data going back to 2010, according to Fannie Mae’s National Housing Survey, up from the 23% to 28% range during the free-money buying frenzy in 2021-2022.
That 36% share has surpassed the highs of 2010 and 2011 during the housing bust, as home prices were in freefall. And the trend (blue arrow in the chart below) is promising to make renting an even more popular choice because it makes financial sense.
This is just another indication that the 50% explosion of home prices since 2020 – more in some markets, less in others, fueled by reckless monetary policies through 2021 – has created a peculiar situation where on a monthly cost basis, it is now far more expensive to buy a home than to rent an equivalent home pretty much across the country. And people are figuring this out, and they’re starting to engage in an arbitrage to take advantage of a price difference between similar products.
“One effect of the prolonged period of relatively high home prices of the past four years is that we are seeing a slowly growing preference to rent rather than buy on consumers’ next move,” Fannie Mae said.
“With rent growth expected to remain modest in 2025, more consumers may be seeking – and finding – attractive deals in the rental market as they continue saving toward a future home purchase,” Fannie Mae said.
But it’s not just too-high prices. Mortgage payments at today’s rates, for homes at today’s sky-high prices, plus property taxes on those sky-high valuations, plus skyrocketing homeowners’ insurance have seen to it that the monthly costs of buying a home today have far outrun the monthly worry-free costs of renting.
Simply comparing the trajectories of rents and home prices – excluding the effects of higher mortgage rates, soaring property taxes, and spiking homeowners’ insurance premiums – shows just how far home prices have gone out of whack.
For this purpose, we’re looking at the Consumer Price Index for Rent of Primary Residence via the Bureau of Labor Statistics’ CPI data (red) and home prices via Zillow’s “raw” Home Value Index data (purple) both set as index where January 2000 = 100.
And we see that rents have also surged, but not nearly as much as home prices. Again, this measure of home prices excludes the additional homeownership costs of higher mortgage rates, soaring property taxes, and spiking homeowners’ insurance premiums.
People are doing some basic math and are finding out that they’re getting ripped off if they buy an existing home now. If they buy, they will just make the sellers and Realtors rich, feed investors’ interest income from MBS, stuff local government coffers, and fatten up the revenues and profits of insurance companies.
As more and more people have engaged in this arbitrage to take advantage of a price difference between similar products (renting v. buying a similar home), demand for existing homes has plunged to the lowest levels since 1995.
As demand has plunged, inventories and supply of new houses and existing homes have spiked, see the charts in the comments below.
And this growing preference for renting instead of buying will sap demand for home purchases even more, with sales having already plunged to levels not seen since 1995. Too-high prices destroy demand, which is a fundamental economic principle that even home sellers cannot escape (light-blue column = our estimate for 2024, historical data from YCharts).
If people rent a similar home, rather than buy it, they have more flexibility at a much lower monthly cost, they can save and invest this money or spend it, and they won’t be house-poor.
And with home prices now being targeted by higher mortgage rates and $2 trillion of QT so far – QT is in part responsible for those higher mortgage rates – these renters who choose to rent instead of buying have no risk of losing additional money when property prices head south, which they have already started doing in some markets, from our Most Splendid Housing Bubbles in America:
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This “if there were to move” should probably read “if they were to move”
Sure seems like big corrections are bound to be coming to a housing market near you. I wonder what the real trigger will be for sellers to regain a healthy sense of reality when pricing their homes?
I’m #2!
Not when you count replies to #1. But you’re right about being a steaming pile of #2 if this is all you have to add to the conversation.
Thank you, Wolf!
So much excellent data!
Yay! At 36%, irrational exuberance and FOMO are dead with buying a house.
At least they are down to the levels below the darkest hours of 2012 during Housing Bubble I.
You included my favorite chart: CPI Rent and Zillow Home Value.
The current gap is 1.5X wider than the gap during the peak of Housing Bubble I in 2007. Just before everything crashed.
A good time to buy would be when the lines intersect again like they did in 2012.
From your excellent chart, this intersection could happen if:
1) Home values fall 30% and rents stay constant. This would be similar to the 2008 HB crash. With increased taxes and insurance putting upward pressure on rent, rent will likely not stay constant. Also, I believe the powers that be will not allow home prices to fall more than 20% to avoid the foreclosure disaster last time. You can’t have too many houses underwater from downpayments or refi/HELOC equity minimums without a disaster.
2) Rent increases 20%(to cover increase insurance, services, and tax costs) and home values fall 10-15%. This may take 2-3 years but the lines would intersect without too much pain.
3) A major job loss recession and stock market crash could cause both to fall.
I’m betting on #2 to re-ignite buyer interest above unless the Fed loses control.
Rents are close to peaking, if they haven’t already. They only appear
“cheap” relative to the high cost of owning.
Home prices already peaked and most of the future sales will be at much lower levels. Sellers are slowly reducing list prices – way too slowly. In many cases they’ve had multiple reductions and the houses still aren’t selling. This means they’ll have to reduce prices even more to sell.
You really get excited over a 13% sentiment rating fluctuation.
Will new home builders ever throw in the towel and stop construction. ?
Will they lose money? Will any go belly up?
I seem to remember that happening in the distant past.
Well the stripper in The Big Short bought 5 houses. Maybe they got tired of her calling. 😂
We were building new subdivisions from late 60’s til late 70’s and boom , no kaboom:construction dried up!
Seems like the Pulte’s and the like are making a few more concessions that are not sustainable. Kaboom?
Owning a home is soon to become an opportunity afforded fewer Americans due to land use restrictions, urban growth boundaries, aversion to building condominiums or converting apartments to condominiums. However opportunities are always available for the buyer who works at it and makes some compromises to get on the home ownership track. The best time to buy a home is when you can. The best time to own a home is now, especially if you are retired living on a fixed income.
Or you could just rent something minimal and have extremely good saving and investing habits. Then your goal is to retire to a cheap area where you can have a house built to spend the rest of your days.
That’s a pretty simple and clean goal.
And also you could take up lots of hobbies once you retire. Hobbies are funnnnnnnn
Axis for the chart of annual sale of existing homes are deceptive and blown out of proportion that is not a huge difference between annual sale of 5 million versus 4 million it’s just a 1 million difference but somehow it is being shown as huge bars because it starts at 3 million instead of 0.
This may be true, but 1 million is still 20%. If prices dropped 20%, this whole article wouldn’t have been written because sales would be normal.
This may be true, but 1 million is still 20%. If prices dropped 20%, this whole article wouldn’t have been written.
Element – “That is not a huge difference” Are you serious??? It’s a colossal difference!
That’s about $25 Billion in real estate commissions if the average transaction price is around $400k.
For perspective, the total outlay from Social Security payments is $100 Billion annually.
This is not a recession in the industry of real estate agents. This is a depression in that industry.
You got stuck on the graph axis and completely missed what the graph is telling you.
Thanks for the perspective. 4 million at $400,000 is 1.6 trillion and 5 million at $300,000 is 1.5 trillion. median house prices going up at least $100,000, more probably
This is our family. We are saving at least $500/mo by renting and our square footage is double what we could afford to buy. Plus we don’t have to worry about repairs or mowing. And NO property taxes. But it’s never a guarantee long-term so that can be unsettling when renewal comes up.
I rent for about a quarter of what I would pay if I bought the house I’m in. That’s an extra 3k plus insurance (owner vs renter) and property taxes I can spend on other things. Yeah, I’m in no rush to buy :)
We moved cross country 2 years ago and have been renting since. I like to look at the houses for sale, but at these prices I’ll keep renting and saving the difference. The risk of missing out on home appreciation seems lower than the risk that prices could drop. When the math makes sense again, we will purchase again.
So they just elected a guy who won because the poor non college grads do not like being poor.
Wouldn’t it be bad if he also made the asset holders (like himself) poor as well?
prob more likely real estate is going from the moon to mars in the next 4 years.
But we will see!