Rising mortgage rates are making the decision on whether to buy a home more and more difficult for Americans.  They are also causing would-be home buyers to feel the pain a bit more than renters.  In Q2, the median monthly mortgage payment was almost one-and-a-half times as much as the median monthly rent price, with the biggest difference on record since 2009.  All these factors are complicating decisions for Americans around buying versus renting.  Daryl Fairweather, chief economist for Redfin, joins Cheddar News' Closing Bell to discuss.

Closing Bell

Is It Financially Better For Americans to Buy or Rent Right Now?

let's turn to the current state of the housing market, rising mortgage rates, making the decision on whether or not to buy a home more difficult for americans and they're also causing would be home buyers to feel a bit more pain than renters. Well, in the second quarter, the median mortgage payment was almost 1.5 times as much as the median monthly rental price with the biggest difference on record since 2009. So all of these factors complicating decisions for americans around buying versus renting and joining me now is Daryl Fairweather, chief economist at Redfin. Daryl, thanks so much for coming on. So for those who are looking to make a move right now, would they be better off buying or renting a home? It really depends on what their long term goals are. They're intending to stay in the same place for at least five years. I think buying is still the better option within that time, home values will go up even if they're flat or slightly down this year and the next year and mortgage rates will eventually come down. It's been a long term trend for the last four decades. So I think once we're out of this weirdness in the economy, rates will start to trend down again and you can refinance your mortgage, you get a lower payment if you decide to keep renting, you're really just at the whim of the market and with inflation and the rising cost of housing and land overall. It's hard to imagine rents going down anytime in the future. So I think it's still a safer bet to buy and lock in a monthly mortgage payment and you may be able to reduce that monthly mortgage payment one day rather than be at the whims of the rental market. But it depends on your goals. So, talk to me about that, viewers might be wondering, what sort of power negotiating leverage do I have? How does refinancing work Darryl? And even if people are stuck with a relatively high mortgage rate today, if they decide to buy, how might they be able to refinance in the future? So the first step is to figure out what you can afford and you can do that by going to a lender and seeing what you can get approved for and how much that monthly mortgage payment would be for the kinds of houses that you see on a place like Redfin dot com that are desirable to you. If the homes that you want or within your budget for your monthly mortgage payment, then that should be a green light and you're gonna have an easier time getting an offer accepted. You're probably not going to face competition. You're probably going be able to get the home for under asking price with contingencies and without whatever terms you want really because the market is more in the virus favor than it has been in years. But getting past that first hurdle of affording the monthly mortgage payment is really hard for a lot of people right now. There's some things you can do, like buying down the monthly mortgage payment with points or going for an adjustable rate mortgage that would be fixed for five or seven years. And then one day if you you can refinance, if rates go down that does cost the money you need, you need to be in a position to do it. You have to have a job and income at that point in time with adjustable rate mortgage, it would automatically adjust to whatever rates are after the five year or seven year lockup period. Do you think a fixed mortgage rate is the best option for most potential homebuyers now Darryl or how should they be looking at potentially an adjustable rate mortgage? I know adjustable rate mortgages got a bad rap during the last housing bubble. I mean, they were kind of out of control back then with 0% down and nobody checking incomes and also the expectation that home prices could only go up so you could just sell if you wanted to get out of it. I think if you go into adjustable rate mortgage with open eyes, knowing that, you know, there's a chance that rates go up five years from now, even though it's more likely that will go down. If you're prepared for that risk, then you can get a better deal by going the adjustable rate route over the fixed rate route and you can refinance either mortgage whenever you feel ready to do so, which is that that does cost money to go through the refinance process and you have to have your credit checked and your income checked all over again. Mm hmm. Now I'm just curious in terms of what we expect from the market here in the next 12, even 24 months carol. We know the Fed is set to raise rates further. Is there any sort of estimate as to where you expect as an economist, mortgage rates will end this year? You know, this is the most uncertain economy I've ever seen. Just in terms of like people don't know if we're being too optimistic or too pessimistic about where inflation is going. It could really go either way. Which is why rates are jumping up and down because the market changes its mind every day about whether they're optimistic or pessimistic about the future. And I think we're just gonna have to wait and see with more data prints to know how quickly the economy will get back to normal. As long as we're in this state of uncertainty rates could go up or down by half a point. But once we do start to get some positive information about inflation, positive information about GDP growth, I think that rates will kind of go back to where they were pre pandemic now in terms of the rental market for people who don't have a down payment ready. They're just simply in a position where they can't yet actually buy a home. What advice would you give them? What should renters be prepared for here in the next few years? I think renters should be prepared for rent to keep getting more expensive home buying right now is more expensive. But homebuyers who are priced out go to the rental market and then that leads to more demand for rentals and that sustains high rental prices. So I don't think that there's really a lot of hope that these rent increases are over. I think they're gonna be, they're gonna continue. I don't think they'll be as severe as they were this last year, but it's hard to imagine rent going down. Maybe it will go down in places like san Francisco because people are leaving san Francisco. But even in new york which everyone said was dead during the pandemic, I've seen this resurgence and people wanting to live there and rent shot right back up. So as long as people are forming households, as long as millennials continue to want a place of their own, I think that there's going to be continued demand for housing across the board whether it's rentals or for sale. Okay, I want to pull up the full screen that we were showing just a moment talking about some of the rent increases that we've seen the highest rent prices by city Darryl. I know you mentioned new york there. So a one bedroom average rent in july of this year, close to $6000 that's a 27% increase from july of last year, pretty high prices and increases in calif or As well 2% increase, it turns out in boston Massachusetts. Do you think this is weighing on consumers minds at all and they think about trying to save and the housing market, what might be a strategic decision for them in the long term when it comes to both managing a career and making these long term investments like potentially buying a home. Yeah, I think these rent increases are impacting people's decisions especially so in new york I think is a good example because if you can't buy, if you can't afford the rent for new york apartment, chances are you can't afford to buy a new york apartment either. So those people are looking towards New Jersey, they're looking towards philadelphia to find the place that they can afford to live. But once they leave new york they realize, oh wait, homeownership actually is more attainable, you can buy a home in New Jersey or philadelphia for like half a million dollars compared to over a million dollars or over $23 million in Manhattan. So I think it just changes the whole entire mindset of people, housing has gotten so unaffordable. People are starting to consider parts of the country, they never would have considered before. And with remote work, it makes those kinds of moves even easier. We always hear about the spring buying season, the spring buying or selling season, however you wanna phrase it, I think it can go both ways and we know for families certainly they do tend to try to be in a home before the new school year starts are their seasonal factors at play Darryl. For anyone who is considering buying a home, what should they take into account as to what might be the best decision to act on that on a seasonal basis? Yes, So you'll find the most homes for sale during the spring, but you'll also be facing the most competition in terms of other buyers during the spring. That's when the most activity happens now that it's fall. The housing market is really starting to cool down. Not as many people are looking to buy homes, but also not as many homeowners are listing their homes, it's a time of year where you're probably going to have the highest chance of getting a home for under asking price and getting a deal on a home that's been sitting on the mark. But if you're looking for that ideal home that has every single feature that fits your criteria, you might be better off waiting until the spring when there's more selection. Alright, Darryl, we're going to leave it there. Thank you so much for joining that Daryl Fairweather, Chief economist at Redfin