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Luke Vargas: Hey, What’s News listeners? It’s Sunday, February 11th. I’m Luke Vargas.
Annmarie Fertoli: And I’m Annmarie Fertoli for the Wall Street Journal. This is What’s News Sunday, the show where we tackle the big questions about the biggest stories in the news. We reach out to our colleagues across the newsroom to help explain what’s happening in our world.
Luke Vargas: This week, we’re answering your questions about the state of the housing market. Considering everything from what future interest rate moves mean for those of you looking to rent or buy to how to know when it’s the right time to refinance, this falls a whole lot more in between. All right, let’s do it.
First off, let’s quickly recap the overall state of the housing market, starting with a look at mortgage rates. According to Freddie Mac, the average rate on a 30-year fixed is 6.63%, or about three percentage points higher than before the pandemic making borrowing for a house a much more expensive proposition than at any time in recent years. Add to that, home prices are also increasing, with the National Association of Realtors saying that existing single family homes sold in December on average fetched $387,000 up from $277,000 in December, 2019. And partly as a result, that’s led home sales down to their lowest level in almost 30 years.
So what does all of that mean for people looking to get on the property ladder or to put their money into some real estate? With me, I’ve got two Journal reporters who can dissect it all. Will Parker writes about the housing and residential real estate market and Veronica Dagher is a Journal personal finance reporter.
Will, Veronica, I’m going to put this to both of you. Between these three factors, mortgage rates, home prices, and the state of the housing supply, is there one of these that’s kind of the driving factor now that explains the state of the housing market as a whole? A market that’s become tricky really for many people to navigate.
Will Parker: It’s hard to pick one, but I think home prices might be it because if you remember, we were having a lot of problems with home prices being too high for many middle income people before interest rates took off. And of course, it only got worse during the pandemic and with interest rates rising on top of it. Home prices are still rising, they’re going up at about 5% still, which is a lot less than 20% that was seen in a lot of places during the pandemic years, but still pretty fast rate of growth. So that continues to weigh on the entire country.
Luke Vargas: Veronica, is that what you’re picking up that that’s kind of where the rubber meets the road, the big issue above all the others?
Veronica Dagher: That’s an issue, no doubt, that’s a big one. Lack of homes for sale is also a biggie. Now, there’s varying estimates, but there’s a shortage of desirable single family homes in this country. So even as mortgage rates come down, prices may continue to rise in certain areas of the country because there’s a lot of pent-up demand chasing still limited supply.
Luke Vargas: Prices and supply both coming up there, but rates, obviously, are on a lot of people’s minds too. We heard from actually a range of our listeners and Journal readers about this, and one of them was Jose Gonzalez.
Jose Gonzalez: When do you guys expect interest rate costs to actually be impacting something like home mortgages? I know it takes some time from time that the Fed stops increasing or even cutting rates to actually see those impacts in other products.
Luke Vargas: Veronica, what are you hearing? What kind of gap could we be talking about here between headline rates coming down and that actually impacting people’s pocketbooks?
Veronica Dagher: For some, yes. We have to keep in mind mortgage rates generally aren’t expected to drop below 6% in 2024. So if you’re hoping to get that 3% mortgage rate, generally speaking, those days are over. You probably won’t see that for a very long time. So you have to decide, you have to think about your personal finances and what you can afford now given rates, given home prices, and for some people, that means they need to wait. For some people, that means they might be able to move forward, but if they can find the house that they’re looking for.
Luke Vargas: All right. Sort of a dismaying 2024 rate forecast there, numbers I’m not sure I’d heard before. That’s not the drop I imagine many people would be expecting, which I guess, could put off the turn of events that listener Allison Vanliew is waiting to come about. She’s hoping to refinance. Let’s hear from her.
Allison Vanliew: My husband and I just closed on our first house a week ago and our rate is 7.5, and although that’s very high, we’re looking forward to rates dropping so that we can refinance while we still have time in the home and can lower our payments. So it’s almost a plan for financial security in the future knowing that there’ll be an opportunity to refinance when interest rates drop 2% or more over the coming years.
Luke Vargas: Veronica, on this, you reported recently on the gradually improving mortgage outlook for borrowers. Now, some people are already taking advantage of that. What do you make of Allison and her husband’s approach here? When might they see rates fall to a level where refinancing could be viable?
Veronica Dagher: Well, I think we should know there is some risk to this strategy. A lot of realtors will tell you to date the rate and marry the house, but keep in mind it’s not always possible to refinance if you lose your job or there’s some other big negative change to your finances. That’s why buyers should focus on what they can afford now and not buy the house today with the assumption that rates will fall in the future. That said, hopefully none of those things will happen to Allison, but I recently spoke to the chief economist at Morningstar and he told me, people looking to refinance might be better off if they wait until mortgage rates are back below 5%. And that’s because given the fees, you don’t want to refinance above 6% and then have to repeat the process when rates fall further. To make refinancing worthwhile, you need to consider how closing costs and the breakeven point, which is basically the time it will take you to recover the money it costs to refinance will affect your overall finances.
Luke Vargas: All right. We’re going to take a very quick break and when we come back we’re going to look at America’s housing supply, or more accurately, the lack of homes for sale, plus some encouraging signs for renters. And we mean that, that and much more after the break.
Even if you’re in a position to buy a home, there needs to be a home out there for you to buy. And lately, that balance has been a little bit out of whack. Just a few weeks ago when the Journal asked readers about what needed to happen in order to turn around the housing market, a number of you wrote in to point out that it is the housing shortage that’s the real issue.
Will, I want to bring you in on this one, just remind us, if you could, about the state of the American housing stock, as well as any changes that have been occurring lately and how people are making decisions about when to leave their current place, which, as far as I understand, is a pretty big driver of some of the imbalances that we’re seeing, right?
Will Parker: Yeah. I guess, to take the first part, most housing economists have described the US as undersupplied housing-wise for many years now. But recently, there’s been a big upswing in construction and building and a lot of that has been in the apartment industry. We’re building more multifamily units, about half a million a year the last couple of years, those rates of construction have not been seen since the 1980s, so that’s where a lot of the supply is coming from. Single family homes though have never returned near the heights they reached before the crash in 2008. And so there were years after that where home construction remained relatively low. A lot of housing economists think we’re still paying for that. We were under building for so many years that we’re still just deeply undersupplied in single family homes.
People are moving less in single family homes as well because they’re locked into these low mortgage rates. That’s keeping a lot of the supply off is simply people not wanting to move who have cheap mortgages. But rentals is a little bit different. You’re seeing all of this supply, it’s near center cities for the most part, it’s the most expensive apartments. So you’re seeing a lot of competition among renters at kind of the highest end of the market and you’re seeing rents fall for some of these higher end properties.
Luke Vargas: On the topic of inventory, Veronica, one question that we heard from listeners got at this relationship between rates and the supply of homes. Let’s hear this question from listener, James Fox.
James Fox: The biggest question my wife and I have right now is when should we purchase a home? Should we use the savings that we’ve accumulated now to buy a home at a higher interest rate? Or do we wait for a lower interest rate and risk a bidding war happening and potentially paying more for a home at a lower interest rate?
Luke Vargas: Veronica, I don’t know James and his wife’s backstory here, but I can almost detect a little bit of, I don’t know, a fear of missing out here. This sense that over the last few years the situation in the housing market had chased away some buyers and now there’s a concern that if you wait too long, you’re going to be fighting with a whole lot more people who are also rejoining the ranks of those looking for homes. What do you make of that?
Veronica Dagher: When to buy is this big question on so many hopeful home buyers’ minds. It’s a tough call. All the financial planners I speak to say that if you can find the house you want and you can afford it now it may make sense to go for it. And they say may, and I say may because you really have to do a deep dive into your finances to see if you can truly afford it and ask yourself a few key questions such as, especially these days, how stable is your job? Will you be able to afford the home insurance and the property taxes? Do you have enough money saved if the furnace breaks or you need some other sort of repair? And are you going to become house poor? Meaning, all of your money is going to get tied up in the house, but you’re going to be stretched each week to buy groceries. So you have to take a close look at your budget. That’s the first and foremost issue folks need to address.
Luke Vargas: Will, would that calculus that Veronica laid out there change at all for people who are investing in real estate, maybe looking to rent out a house or apartment that they’re able to buy?
Will Parker: No. Investors are held back in some of the same ways that home buyers are. The cost of debt, getting a loan, getting a mortgage to finance an investment property is much higher now just as it is for buying a home. And that’s why you’ve seen sales of investment properties of all types, whether it’s apartments, hotels, retail, that has all gone down significantly over the last couple of years. You’re seeing something interesting happen with homeowners though, who instead of selling their houses are putting them on the market for rent and becoming landlords. And the reason they’re doing that is because there’s just not a very good market for home sales, but there is really high demand for rentals and renting single family homes in particular. So this trend has really taken off in places like Texas, markets that rose really quickly and now have kind of been sliding down demand-wise for some time. Now you see it in California and I think we’ll probably continue to see more of it for as long as the home sales market remains semi-frozen.
Luke Vargas: Veronica, what is the outlook for renters? You wrote recently about this rise of lifelong renters, would-be buyers who’ve just had to give up on the possibility as well as others who plan to rent forever. Does this speak to a generational shift perhaps in how we consider real estate the first big investment of many people’s lives?
Veronica Dagher: Right. There’s a lot of crosscurrents. So yes, for some people choosing the lifestyle of a renter, they want to be renters forever. In that camp, there’s two different camps. There’s one camp that it’s people they just can’t afford to buy and they’re not happy about that. But then there’s also this other camp of people who want to rent forever because some of these apartment buildings, some of these complexes are pretty luxurious and you see why, I mean, they have indoor pools and golf simulators and concierge services and a playroom for the kids. The list goes on. And so life is easy and they’ve done the calculation that, financially, it’s better for them to rent in the market they’re in than buy and they enjoy the lifestyle.
And yes, 2024 is a more favorable year for renters so far. More apartments, as Will mentioned, have come online. There’s more construction. Renters, in turn, have a bit more leverage when it comes to negotiating their leases because no landlord wants their place to sit empty. So it’s a good time for renters who have paid through the nose for the past two, three years.
Luke Vargas: Will, is that the outlook you see taking shape here?
Will Parker: Yeah, I think that’s about right. But the cost of rent for most renters who live in normal apartment complexes, that’s still rising in most of the country. It’s still going up. It’s at a lower rate, as Veronica mentioned, but when rents have risen over 20%, you’re not really getting any relief from inflation if they’re still rising at all. And that’s what’s happening.
Veronica Dagher: Right. Yeah, there’s some good news for sure, but it’s also still very tough for many people, especially if you haven’t gotten a big pay increase and you’re having to pay higher bills for everything from your rent to your groceries to your electric bill and you’re trying to save for a house. You’ve got all these things going on. It’s a difficult time for a lot of people’s budgets right now.
Luke Vargas: I’ve been speaking to Wall Street Journal reporters, Veronica Dagher and Will Parker. Veronica, Will, thank you both so much.
Veronica Dagher: Thanks for having me.
Will Parker: Thank you.
Luke Vargas: And that is it for What’s News Sunday for February 11th. Today’s show was produced by Charlotte Gartenberg with supervising producer, Sandra Kilhof. We got help from Kate Bullivant, as well as deputy editors, Scott Saloway and Chris Zinsli.
I’m Luke Vargas and you’ll hear from me again with the new show tomorrow morning. Until then, enjoy the rest of your Sunday and thanks for listening.
