Mortgage Rates Have Fallen, but Many Renters Still Can’t Afford to Buy
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Here's your money briefing for Thursday, October 3rd. I'm J.R. Whelan for The Wall Street Journal. Renters and prospective homebuyers have been waiting and waiting for mortgage rates to come down in order to enter the housing market. But even though rates have dropped more than a full percentage point over the past 12 months, the math is still stacked against them.
They are a little fed up because they feel like they've nowhere to go. If you want to be a homeowner and you don't have that option, it's frustrating. Also, if you're in a situation where you can't wait for mortgage rates to drop, if you have to move, say you're having another baby or you just got divorced and you need to start over in a new place, this is a really tough situation.
How much further do mortgage rates have to come down for it to make sense to go from renting to buying? We'll ask Wall Street Journal personal finance reporter Veronica Daggard after the break.
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Lower mortgage rates do not necessarily mean it makes financial sense for renters to buy a home. Wall Street Journal personal finance reporter Veronica Dagger joins me.
How have 30-year mortgage rates changed over the past year and why does it matter?
Veronica, 30-year mortgage rates are averaging just over 6%, a full percentage point lower than a year ago. Let's start with renters. Why hasn't that been enough to bring them into the buyer's market?
Home prices aren't low enough for them to take action. Mortgage rates aren't low enough for them to take action. Essentially, the difference between buying and renting is still significant. And so it's still essentially cheaper to rent in most areas of the country than it is to buy. And you're talking hundreds of dollars every month cheaper to rent than it is to buy. And until that equation changes, most renters are saying, you know, no, thanks. I'm good where I am.
The Federal Reserve is expected to continue to lower interest rates, which in turn could cause mortgage rates to come down further. How are renters planning for that?
Many renters are waiting to see what happens with rates in the next year or two. So several are choosing to stay put. 62% of renters renewed their leases in the second quarter of this year, and that was up from 60.5% a year ago, and that's a stat from Rent Cafe. So people are not seeing the math working for them, and they're not rushing out of their apartments And some people are saying, you know what, maybe I want to be a lifetime renter. Maybe I want to stay in my apartment for the long term and take the money I would have put towards a house and put it in the stock market where I'm probably going to perform better anyway.
You spoke to an economist who said that mortgage rates would have to fall to about five and a quarter percent, about one percentage point lower than where they are now, for it to make sense for renters to buy. Why that number?
Well, if you look at a 30-year fixed mortgage, he's saying rates need to fall that much for the monthly payment on a $419,000 home to close in on the average US rent of about $1,800 or so. And so it's pretty far apart because right now, as you know, mortgage rates are about 6.08%. And he's saying you'd need to drop all the way to 5.25.
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