Why are rental and home prices soaring in the US?
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(CNN Business) --
Anyone looking for a place to live right now is navigating one of the most difficult and expensive housing markets in recent US history.
The pandemic's momentum in US real estate saw home prices hit a record high of $375,300 in March, 34% higher than the median price of $280,600 in March 2020, according to the National Association of Real Estate Agents of that country.
And in recent months, mortgage interest rates have been on the rise, with the median rate on a 30-year fixed-rate mortgage rising above 5%.
This has made the cost of home financing 40% more expensive than a year ago.
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Although rents in some big cities plummeted at the start of the pandemic, they have largely recovered, surpassing pre-pandemic levels in many places.
The median rent is up nearly 20% from two years ago, with asking rents in the biggest real estate markets hitting a record $1,807 a month in March, according to Realtor.com.
All of these rising costs can make the decision to rent or buy a perplexing one.
"Buy now before mortgage rates go higher and start building wealth!" says the part of your brain that chooses to buy.
"Keep financial flexibility and lower entry and exit costs!" says the voice urging you to rent.
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There are arguments to "wait" until prices stop rising so fast.
But for most people, housing is not an option, but a necessity.
Ultimately, the decision comes down to your current location, the state of your finances, how long you plan to live in the house, and how much cash flow you have.
These are some questions that could help you decide what is best for you.
Where do you live?
Ultimately, the decision comes down to where you live, your financial capacity, how long you plan to live in the house, and your liquidity.
These are some questions you can ask yourself to help you decide between buying or renting.
In more than half of America's 50 largest cities, the monthly cost of purchasing an initial home was more affordable than renting a similar-sized unit, according to a Realtor.com report published earlier this year. .
The 10 most expensive ZIP codes in the United States have median home prices of more than $4 million
But given the rapid rise in home prices, there are some areas where renting is more affordable than buying.
In Austin, Texas, for example, it was better to rent than buy in January.
Other cities in this situation are New York, San Francisco, San Jose, Seattle, Boston, Denver, Rochester, Portland and Los Angeles.
In these 10 cities, the monthly payments associated with buying an initial home were 42%, or $978, higher than rents, on average.
Home sales to first-time buyers in those locations included a higher median condominium ratio than the national rate, and higher homeowners association fees.
Places where buying was more beneficial than renting included Birmingham, Alabama, where the cost of an initial home purchase was 44.3% less than the cost of renting in January.
Cleveland, Pittsburgh and Saint Louis followed.
Two Florida cities, Tampa and Orlando, posted some of the highest annual rental growth in January, making buying more attractive even as home prices and mortgage interest rates were on the rise.
How are your finances?
The decision between renting or buying a home has less to do with home prices or rent and more to do with whether you're ready to own.
How will your savings look after making a down payment?
What is your credit score?
Andrew Dressel, financial planner at Abundo Wealth in Minneapolis, recommends that people have six months of expenses saved in an emergency fund.
He also has $10,000 in cash to cover closing costs and moving expenses, and a credit score of 720 or higher.
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"Emergency savings are of great importance. And a credit score of 720 gives you more wiggle room," he explained.
In addition, the total cost of owning a home should not exceed 40% of a person's take-home pay, he said.
This includes your mortgage, utilities, taxes, appliance and yard maintenance, and daily wear and tear.
"They also need to make sure they're not sacrificing retirement or other goals just to own a home right now," Dressel said.
How long do you plan to live there?
If you only plan to live in a place for a couple of years, experts generally recommend renting.
If you're feeling overwhelmed or rushed to buy in a choppy market with little inventory available, renting isn't a bad place for a short period of time, said Jay Abolofia, a certified financial advisor with Lyon Financial.
It also dismissed the sense of urgency felt by many potential buyers to lock in mortgage rates to the record lows they are currently at.
As he explained, interest rates and home prices often have an inverse relationship.
"When interest rates are lower, that puts upward pressure on house prices," he said.
"Just because interest rates are low doesn't mean it's a good time to buy. And higher interest rates doesn't mean it's a bad time to buy a home," she added.
But, Abolofia noted, it's always a good time to shop if you plan on staying there for a while.
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Once you've determined the estimated length of time you'll be in the house, check by asking yourself if you're being conservative enough about the space you can buy.
That was the recommendation of Leonard Steinberg, a Compass agent in New York.
"You have to be conservative enough to be able to eat and sleep peacefully at night," Steinberg said.
"But a lot of people are too conservative," he added.
He said he often sees people buy houses that are too small.
And, after a few years, they realize the space doesn't work for their needs, she said.
"Now they have the costs of selling and buying again," he said.
A situation that includes closing costs, inspections, appraisals and real estate commissions.
"Moving a lot is expensive," she noted.
How much are your monthly fixed expenses?
As a homeowner, you'll need to figure out how liquid your monthly mortgage payments will be, how much money you'll need up front to complete the transaction, and how much you'll need to maintain it.
There's no point in rushing into a home purchase before you can comfortably cover those costs, says Noah Damsky, a chartered financial analyst with Marina Wealth Advisors in Los Angeles.
Damsky recommends that the monthly mortgage payment not exceed 35% of gross income.
But that's the top end.
Other models are more conservative and suggest 25%, in order to keep the debt-to-income ratio lower.
An intermediate recommendation would be not to allocate more than 28% of the gross monthly income to the payment of the mortgage.
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While some potential buyers may expect the tax benefits of owning a home -- including deducting mortgage interest, property tax payments and other federal income tax expenses -- Damsky cautioned against going overboard. .
"I try to temper your expectations by explaining that the tax benefits will often be substantially offset by an annual maintenance cost of about 1%."
And they must take this into account.
The out-of-pocket costs of keeping a home could be even higher, said Matt Hylland, a financial planner at Arnold and Mote Wealth Management in Cedar Rapids, Iowa. He advises homebuyers to budget 2% to 3% of home value. housing to cover maintenance and upkeep.
"It's important to make sure you find a monthly payment that you can afford," Hylland said.
"But don't forget to add those other expenses that you will assume as the owner."
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