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“The most important quality for an investor is temperament, not intellect… You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” Warren Buffett

Market Data Update

What’s Going On?

Let’s get to it

• The median asking rent decreased by 0.4% compared to last year.

• Home prices declined by 3% YoY, according to Redfin's latest report.

• Mortgage applications fell by 8.8% in one week due to increasing mortgage rates.

• Sales of previously owned homes dropped by 2.4% from February to March.

• Homebuilder sentiment increased in April, driven by the home shortage and heightened demand in the spring season.

The Breakdown

Let’s first address Redfin’s report on the 3% decline in median home prices compared to last year. This is definitely true, but it’s important to remember that the housing market skyrocketed last year until June when interest rates began to substantially rise. However, this does not mean that home prices are currently falling. In fact, we are seeing a strong spring season with increasing home prices compared to last month. According to Redfin’s data, the median home sale price in April is $366K compared to $356K in March. By my rough estimate, that’s a 2.8% increase month over month.

Now let’s get into the rental market. After months of slowing growth, rental rates have fallen in March compared to last year. You must be asking yourself why rental rates are falling when many people are forced to rent due to home affordability issues. Here is my working theory:

1. Interest rates drop due to the pandemic, increasing home buyer demand.

2. High demand leads to higher home prices, making housing expensive for many people.

3. Expensive housing takes potential buyers out of the market, forcing them to rent, which increases the demand for apartments.

4. High demand for apartments results in higher rental rates.

5. Interest rates start to rise as inflation skyrockets, decreasing home buyer demand.

6. Low home buyer demand reduces builder sentiment for single-family homes and turns their attention to building multi-family apartment complexes.

7. A higher supply of apartment complexes leads to lower rents.

This may be an oversimplification of market trends, but the latest new construction report from the US Census Bureau shows that multi-family home completions increased by 60% this year compared to the last.

Lower rental rates may give some relief to renters, but it’s not ideal for the housing market. If interest rates remain extremely volatile, potential buyers may opt to rent for another year, especially if their rent is lower. Also, declining rental rates discourage investment. Higher interest rates have already increased the cost for investors, but declining rental rates would take away all incentives. Overall, fewer home buyers and investors result in lower demand for houses, which can have a negative impact on home prices.

However, I believe that if mortgage rates hover around 6% or below, then the excess home buyer demand will stabilize home prices for the remainder of the year.

_{Important Note: The above passage is our commentary and opinions about the real estate market, NOT financial advice.} 

Investing Tip Of The Week:

Renting vs. Buying: Which is Better?

Deciding to rent or buy a house can be a daunting task. Factors such as personal finances, lifestyle, and future plans must all be considered. Fortunately, the New York Times has a rent vs buy calculator that can help make the decision easier (linked here!).

This calculator accounts for several factors such as the cost of the property, the mortgage interest rate, property taxes, closing costs, and the expected length of ownership. It also considers the expected annual rent increase, the rate of return on investments, and the inflation rate. By inputting this information, the calculator provides a comparison between the total cost of renting and buying over a certain period of time.

Some of the economic variables in the calculator may be hard to estimate such as the rate of return on your investments or the inflation rate, but plugging in the national average statistics for these variables may serve you well. On the other hand, many people input the national average statistics for the housing market variables (e.g., rent growth rate), but it’s highly recommended to search your local statistics for an accurate calculation.

It's important to note that the calculator is just a tool and should not be the sole factor in making a decision. It's also crucial to consider your financial goals, lifestyle, location flexibility, and future plans.

Renting can be a good option if you value location flexibility, have less financial stability, or have short-term plans. It can also be a more affordable option if you live in an expensive city with high home prices that may rent for less than the mortgage payment to own. Additionally, if you prefer not to deal with the responsibilities and costs of home maintenance, renting may be a better fit for you.

On the other hand, buying a house can be a smart investment if you have a more stable financial situation and long-term plans. It provides the opportunity for equity growth, tax benefits, and stability in living arrangements. Owning a home also allows you to make any desired modifications or renovations to make the property truly your own. Not to mention, home ownership is one of the greatest ways to build wealth!

Ultimately, the decision to rent or buy a house is a personal one that depends on individual circumstances and priorities. While the rent vs buy calculator is a helpful tool, it's important to consider all factors before making a final decision. The choice you make will impact your life, so take the time to weigh all options and make the best choice for you.