Earlier this month, there was encouraging economic news reported with the unemployment declining to 7.5% from the previous month’s 7.6% and the lowest rate since 2008. 165,000 jobs were added, beating market expectations of 138,000. It was interesting to see that the unemployment rate amongst our nations youth is reported to be 16.1%.
Interest rates are at historical lows but they won’t last forever. That said, there has truly never been a better time to buy a home. The affordability index, which shows the relationship between mortgage rates, median household income, and median home price indicates that consumers have more buying power now than in the last several decades. Low interest rates give consumers more buying power by allowing them to purchase a more expensive home. As interest rates rise, consumer’s buying power decreases and it costs more to purchase the same home. For example, The Federal Reserve is currently purchasing mortgage backed securities (MBS) and that is what is keeping rates artificially low, however, the fed has stated it will likely discontinue these purchase of MBSs within the next couple of years and with that, rates will likely rise and consumer’s spending power will not go as far.
The rent versus buy notion has long been contemplated by consumers considering purchasing their first homes or a move up buyer who is considering selling their existing home and purchasing a new one. Accordingly to Housing and Urban Development, the number of U.S. households who own homes declined by 106,000 compared to the previous year. The number of households renting increased by 1.05 million during the same time period. Is this an opportunity that we can seize upon to educate contemplative would be buyers? Consumers are much more financially conscious than they were prior to the economic recession and require more data and education in making buy decisions. I came across a comprehensive buy versus rent tool on Fox Business website at http://www.foxbusiness.com/personal-finance/tools/should-i-rent-or-buy-a-home.html
This calculator take into account in depth information about the consumer’s rent and intended purchase details and amortizes out the buy versus rent breakeven and savings over time. I have used this tool along with the mortgage affordability calculator to educate clients on the financial advantages of ownership aside the more obvious factors including having a place to call their own and not being at the mercy of a landlord. With the local tightening vacancy rate driving rent prices up, it is cheaper in many cases for a consumer to purchase a home. I ran three scenarios using the above calculator ranging from rents of $1,100- $4,500 and home prices of $350,000-$1,200,000 and in all cases, it was more advantageous to buy. The graph below illustrates the cost outlay of rent annualized versus putting the same dollars toward homeownership.
Economic indicators of interest to watch this week includes Consumer Sentiment Index which is directly related to consumer spending. This monthly economic indicator comes out Friday (5/17) of this week. This is one to watch as consumer attitudes and spending is often of foremost influence on stock and bond markets.