How will the rent-versus-buy math change over the next year? Two factors matter most: (1) whether prices or rents are rising faster, and (2) what’s happening to mortgage rates. Looking forward, the gap should narrow more sharply because both factors should work together to raise the cost of buying relative to renting.
First, home prices are likely to keep rising faster than rents. The continued economic recovery will make people more able and interested to buy a home, boosting the demand for housing while inventory remains tight, fueling price increases. At the same time, the increase in multi-unit-building construction should add more supply, especially to the rental market, which will keep rent gains modest.
Second, mortgage rates are likely to rise in the next year as the economy improves, even though they fell in the past year. The consensus among macroeconomic forecasters is for 10-year Treasury bonds –which 30-year fixed-rate mortgages track pretty closely – to rise 6 or 7 tenths of a point over the next year. This translates roughly into a 7-9% higher monthly payment for a given mortgage.
Together, prices outpacing rents and higher mortgage rates will make buying less affordable next year relative to renting than it is now. By this time next year, the cost of buying could even exceed the cost of renting in some of the priciest metros. The rent-versus-buy decision depends on so many factors, both economic and personal, and next year the math could look very different.
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