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With existing home sales at a three-year low, are more people turning to renting?

Rising mortgage interest rates make renting an attractive option

With home prices and interest rates both on the rise, will more people look to renting as their only “affordable” option for housing? It looks like that might already be happening.

Newly released data from the National Association of Realtors shows that existing home sales fell to a three-year low in September, as home prices rose for the 79th straight month. That’s more than six years of monthly price gains, and it’s putting a squeeze on housing affordability.

Another headwind for single-family housing is that interest rates are basically at the highest level they’ve been at in 10 years.

Combine steadily rising home prices with recent record-high interest rates and now people can’t afford as much house as they could just a few months ago.

And that could push people to look for an alternative: renting.

“For a while, inventory was the main scapegoat for sales volumes that failed to launch, under the theory that it's hard to buy meaningfully more homes when there are significantly fewer homes actually available for sale,” Zillow Senior Economist Aaron Terrazas noted about Friday’s existing home sale report.

“But that argument is harder and harder to sustain with every passing month, with nationwide inventory declines slowing dramatically and the number of homes for sale actually on the rise in many large markets,” Terrazas continued.

Instead, Terrazas said that the “recent sluggishness” in home sales seems to be driven by decreasing demand driven by rising interest rates and rents that are finally moderating (or perhaps even slowing down).

And that could keep people renting for the foreseeable future as renting appears to be more affordable than buying for many people now.

“As rents surged in recent years, many renters sought refuge in the homeownership market, attracted by the stability of long-term payment schedules and rock-bottom interest rates that helped keep those payments themselves incredibly low,” Terrazas said.

“With rents stabilizing, that sense of urgency may be diminished somewhat – and renting itself may be seen as a better bargain as rising mortgage interest rates, still-rising home prices and sluggish wage growth dent the affordability advantage of a typical mortgage,” Terrazas added.

NAR Chief Economist Lawrence Yun said there could be a respite for first-time homebuyers if the job market continues to improve, leading to more people having more money to spend on a house instead of an apartment.

“Rising interests rates coupled with increasing home prices are keeping first-time buyers out of the market, but consistent job gains could allow more Americans to enter the market with a steady and measurable rise in inventory,” Yun said.

But NAR President Elizabeth Mendenhall cautioned that there simply isn’t enough single-family housing right now that’s affordable for first-time buyers, another factor that could keep people renting.

“Despite small month over month increases, the share of first-time buyers in the market continues to underwhelm because there are simply not enough listings in their price range,” Mendenhall said.

In fact, it appears that renters are increasingly more likely to view renting as an attractive financial option.

A new survey from Freddie Mac shows that a whopping 78% of renters believe renting is more affordable than owning, which is up by 11 points from just six months ago. That’s despite the majority of renters (66%) reporting difficulty in affording their rent at some point during the past two years.

And that belief is spread across all age cohorts as well. According to the Freddie Mac survey, 75% of Millennials believe renting is more affordable than buying. That’s up by 14 points over the last six months.

It increased in the other major age groups as well. Per Freddie Mac’s survey, 70% of Generation X views renting as more affordable (up 11 points since February) and 81% of Baby Boomers think of renting as more affordable (up eight points since February).

So even though the majority of renters have had “difficulty” paying their rent, they still view renting as a more affordable option that buying. That’s good news for the multifamily business and bad news for the homebuying business.

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