Monthly mortgage payment-to-rent ratios, according to Realtor.com’s chief economist Dr. Frank Nothaft, can affect how long a person decides to stay where she/he is currently living.
If, for example, mortgage interest rates rise, a person considering a move to a new/different home within her/his current area may decide to simply stay put in her/his current home. Why pay more every month due to higher interest rates for a home that costs the same as the current home but is likely not as nice or as large due to rising home prices?
We’re seeing this not moving/staying in place scenario again and again. Currently, the average tenure in a home is +8 years…a full two years longer than people used to stay in their homes not too long ago.
And if, for another example, a person is relocating to an entirely different area, a rise in monthly mortgage payments relative to monthly rental payments may dissuade that person from buying a house in that new area. Why buy a house if it costs less to rent?
Realtor.com’s Dr. Nothaft thinks that monthly mortgage payment-to-rent ratios can also affect future home price growth. In places where mortgage payments are higher than their historical relationship with rent, we can see a falloff of both buyer activity AND a dip in sales prices.
People have short memories. Interest rates in this country were at historical low levels just a couple of years ago and we “got used to” those low rates. Today, the 30-year fixed mortgage rate is currently 4.81%, a FULL percentage point increase from just last year AND not far from a 7-year high of 4.94%, according to Freddie Mac.
Nothaft says in Realtor.com’s November 2018 US Economy Outlook report, “If rates move higher, metros with affordably priced homes relative to rental prices will likely have steady to increasing sales whereas markets with payments high to relative rents may be at greater risk of cooler sales and lower sales prices.”
Take a look at metros with comparative payment-to-rent growth ratios from Q1 2001 to Q1 2018.
Growth Q1 2001 to Q1 2018
Los Angeles +33%
West Palm Beach +14%
New York City +14%
San Francisco +12%
Washington DC + 8%
Raleigh + 4%
Austin – 3%
Tucson – 4%
Houston – 13%
Virginia Beach – 14%
Trenton – 33%