As we move into the second quarter of 2019, many are predicting an increase in inventory of homes for sale as the year continues. Though moderate, experts are predicting a 7% increase in inventory of homes for sale in 2019. The majority of inventory gains thus far have been seen in the luxury home market in high-growth areas: think Seattle, San Jose, Boston and Nashville.
Even though an inventory increase makes for a good buyer’s market, buying a home in 2019 will be an expensive undertaking thanks to rising mortgage rates and increasing home prices. Mortgage rates are expected to hit 5.5% by the end of the year, with monthly mortgage payments rising up to 8%. Homeownership will be far fetched for many, including Gen Z, millennials and other first-time homebuyers.
So what impact will these trends have on the rental market? If you examine the simple laws of supply and demand, it seems to make sense that increased inventory will mean more people will buy homes and rental demand will decrease. However, it is a bit more complicated than that, and there are several factors at play that take don’t fit this simplistic equation. In fact, many renters just aren’t homebuyer material (yet). People continue to rent for a wide variety of reasons, such as:
• Down payments are big: Putting aside rising prices and mortgage rates, let’s look at the biggest financial obstacle to purchasing a home: the dreaded down payment. An average down payment for a home is 20% of the purchase price. If you take the median home price for the United States (around $230,000), this puts the down payment at a whopping $46,000. Many would be hard-pressed to come up with this kind of money to buy a home.
• Maintenance and repairs seem overwhelming: Just this spring, I’ve had to replace a built-in microwave, call in an appliance shop to fix the washing machine, dig up a faulty water line and replace outdoor stonework that was ravaged by the winter storms. Does this sound like a lot? It can seem daunting to some, and so they avoid shouldering the responsibility by renting and letting their landlord do the repairs.
• Flexibility: When you buy a home you are inevitably and unavoidably “tied down.” A friend of mine recently married a partner with a travel bug — she wanted to experience living in other countries for long periods of time. They bought a house anyway and it has caused friction between them because they don’t have the flexibility to move around, pursue new opportunities and have new experiences.
These are just a few of the reasons why even big changes in the housing market may not affect the renter pool as much as one might think. On the other hand, as more homes become available for purchase, investors may decide to take the plunge and add more inventory to their portfolios. This means the possibility of more rental properties becoming available, whereas the laws of supply and demand come into play once again. As more supply of rental properties hit the open market, demand will become less intense and rent prices may go down. If rent prices were to decrease, or even stabilize, it would give renters more incentive to continue renting, saving money and putting off that home purchase for a longer period of time.
Overall, housing affordability has a direct affect on the attractiveness of renting for first-time homebuyers. As home prices continue to rise, we can expect to see a steady pool of renters and for occupancy rates to remain high. Due to the cyclical trends in the housing market, we can also expect home prices to fall if they become too expensive for buyers, giving first-time renters a chance to realistically consider purchasing a home.