Is It Cheaper to Rent or Buy? Exploring the Texas Housing Market

(0:09) Hello, everybody, and welcome to the Texas Real Estate and Finance Podcast market update (0:12) for the week of May the 14th. I'm your host, Mike Mills, a local North Texas mortgage banker (0:16) with Geneva Financial, and I hope all you moms out there had a great Mother's Day weekend. (0:21) If you're anything like my household, I was trying to coordinate two teenagers to do something (0:24) nice for their mother.
My son, of course, had no money, so he decided at the last minute (0:27) that he was going to wake up early, which was a big feat for him, and make his mom coffee (0:31) and breakfast, which she doesn't really eat. But he's trying at least, I guess. It just (0:34) ultimately meant that I had to get up early too and help him because he's a teenage boy (0:37) and mostly a moron.
And I didn't want him destroying the kitchen or burning down the house or anything. (0:41) And then I tried to explain to him that the true gift to his mother would actually be (0:43) cleaning up after himself in the kitchen, so she didn't have a mess that she had to (0:46) clean up or I had to clean up. And I'm guessing all you moms out there would agree with that (0:49) sentiment.
My daughter, however, decided that she was going to go shopping with her friends (0:52) the day before and used it as an excuse to get out of the house for several hours, and (0:56) then chose to spend the night away from home that evening as well. And then of course, like (0:58) all good married couples, I followed my wife around while she got stuff for our moms. (1:02) Because that's what you get when you get married, right? I'm responsible for my wife's (1:05) gifts, which I'm terrible at, by the way, and she handles all the rest.
That's a pretty (1:07) good deal, I'd say, at least for me. But either way, I hope everybody had a great Mother's (1:11) Day weekend out there. I hope you enjoyed time with your family and got a little break (1:14) from this crazy thing we call the housing market.
And now we are back to the grind. (1:17) And there is no place that I would rather be than right here with you guys, dissecting (1:21) this market and finding opportunities. That's what I'm here to help you do.
So what do we (1:24) got on tap for today? Well, of course, we'll dive into interest rates and see what the (1:27) current state of the economy is along with it. Are we in or headed towards a recession? (1:31) And what could that mean for rates? I'll give you updated numbers for the national (1:33) and local Texas housing markets just to see what the summer might hold in store for us. (1:37) Foreclosures are spiking in Dallas-Fort Worth, but not in the way that you might think.
I (1:41) have an update from last week's episode on the bill to rent homes in the United States. (1:44) There's some big players making moves in that market. And at the very end, I'll give you (1:47) some hard numbers on why renting right now instead of buying might seem cheaper overall, (1:51) but it's still a losing strategy, especially in the long run.
Your clients are going to (1:55) need to hear these numbers if they're even considering buying anytime in the near future. (1:58) So as of today, May 13th, according to mortgage news daily, the average offered market rate (2:02) on a 30 year conventional loan is about 7.125%. And the average FHA offered market rate is (2:08) about 6.625%. Now these are slightly down from this time last week, and they're trending (2:12) in the right direction. If you're a fan of lower rates and just for a little context, (2:15) so you understand the impacts of rates when they change on a $300,000 loan, an eighth (2:19) of a point difference from say 7.25 to 7.125 is about $25 a month.
So if rates drop from (2:25) where they are now from 7.125 down to say 6.875 where rates were about a month ago, (2:31) that's a quarter of a point difference. And people will really start getting more excited (2:34) about buying because the rate starts with a six instead of a seven, but that's only (2:38) $50 a month less on that monthly payment. And you would say, well, Mike, $50 is $50.
(2:44) And you would be correct. But the other thing to factor in here is when headlines say rates (2:47) are now in the sixes and not in the sevens, then more people will pile into the market (2:52) to start buying again, especially as we move into the summer. And the other impact that (2:55) change could have not will, but could is that that house your client had their eye on listed (3:00) for $325,000 in this scenario is now going for multiple offers.
And that price just jumped (3:05) up to 335 and that $10,000 in higher price just cost your client $65 a month on their (3:11) payment and maybe even cash over appraisal if it gets into a bidding war. So lower rates (3:15) are good, but not for housing prices, at least while we still have tight inventory. (3:19) Now, what is happening in the economy that is causing rates to start to decline, especially (3:22) if the fed hasn't moved anything yet? Well, during the last fed press conference, J pal (3:26) put to bed the idea of rates increasing this year and still left the door open to two or (3:30) three cuts still.
And I personally believe that unemployment is playing a big role in (3:34) his reason. I think the fed is starting to see the writing on the wall because remember (3:36) the fed has a dual mandate, stable prices and full employment. So you see inflation is (3:41) still higher than the fed would like before they start cutting rates.
But you see the (3:44) things that are truly the most impactful to inflation right now are things that the fed (3:48) cannot control insurance, healthcare, food, gas. These are all the things that monetary (3:53) policy cannot affect, but right now is the biggest part of inflation. What they can control (3:58) is the cost of finance, a car or a home.
And Oh, by the way, we've seen the demand for (4:01) these things dramatically drop and spending on non-essential goods has dramatically dropped. (4:05) And these are the things that the fed can impact. But you see, if unemployment goes (4:08) up more, I believe the fed will start to ease rates, but you have to understand that that (4:12) impact is going to be minimal and it's going to take time for things to change in the economy (4:15) overall.
And just to my point on unemployment, jobless claims came out on Thursday last (4:19) week. We finally saw a much different number than we'd seen over the past 12 weeks to the (4:23) higher side, not by much, but it was a change either way. And it's the highest number that (4:26) we've seen in almost nine months with these numbers finally starting to be a little different.
(4:30) I'm wondering if the BLS finally heard all the questions being answered by everyone out (4:33) there and started adjusting their equations a little bit because 12 weeks in a row of almost (4:37) the same numbers with 3 million, 300 million people is a little bit odd. Continuing claims (4:41) or individuals remaining on employment rose by 17,000 last week to nearly 1.7 85 million. (4:47) This is near the highest levels that we've seen since 2021.
We're also seeing more and (4:51) more revisions to the job data that was showing job growth. But as the data actually starts (4:55) to roll in, we're seeing actual job losses, even with the part-time job data, skewing (4:59) it a little bit. In fact, rather than creating 640,000 jobs in the third quarter of last (5:05) year, we now know that we actually lost 192,000 jobs in the third quarter of 2023, which leads (5:10) a lot of people to think the recession may have started back in the third quarter of (5:14) last year.
Now a company called macro edge has been really following a lot of this layoff (5:17) data. They track public layoff announcements. Now this time of year typically does not have (5:22) a bunch of layoffs compared to say like January where there are more after a holiday season.
(5:25) But in April, we already outpaced January job losses for this year. There were 115,000 (5:30) job losses in April compared to 104 back in January, which is a very odd flip of those (5:35) numbers. So just like we're starting to see home inventories rise at a time when we typically (5:38) see them going down as we go into the spring buying season, job losses are also mounting (5:42) up at a time that we don't typically see them.
So are we headed into recession or maybe already (5:47) there? Well, it took 15 months to determine that the first quarter of 2008 was actually (5:52) a negative number. And it took so long because of revisions to data that happened over that (5:56) period as data came in, that was actual numbers versus forecasted with samples and equation. (6:01) And this is what's happening right now in the job market.
So you got to understand that (6:03) the administration is most likely going to hold off as long as they possibly can on revealing (6:08) bad data because doing so would affect the ability to win the election this year, which (6:11) is why you're seeing so many numbers not making sense in revisions happening much later because (6:16) the market watches these headlines and reacts that it slowly changes as the real data trickles (6:20) in. And oh, by the way, our attention spans are incredibly short these days. So if you (6:23) keep all the headlines really positive, true or not, you can get the sense the economy is (6:27) doing fantastic even when it may not actually be.
But either way, the recession is good (6:31) for rates. So if you're a fan or rooting for lower rates, an economic recession can be (6:36) a good thing, at least in that respect. So if this trend continues, we might get further (6:40) relief for interest rates as we move into the summer.
All right, let's take a look at (6:42) the most recent housing data. So rates have fallen recently and inventory growth was higher (6:47) last week than the previous week, but it was expected to be higher than it actually was. (6:50) However, it was mother's day weekend.
So that could have had something to do with a little (6:53) bit of lag in the data. So on the weekly inventory changes from May 3rd to May 10th, inventory (6:57) rose from 559,000 to 568,000 the same week. Last year, inventory rose from 420,000 to (7:04) 421,000.
So a little bit bigger spike. Now, again, the all-time inventory bottom was in (7:08) 2022 with 240,000 new listings coming on that week. And the most recent inventory peak for (7:13) listings was in 2023 at 569,000.
But again, remember in 2015 active listings for this (7:18) time at that period was 1.1 million. So we're still well off from the highs on listings (7:24) hitting the mark. Now, what encouraging development for 2024 at least compared to 2023 is the (7:28) year over year growth in new listings.
This is a very positive shift for home affordability (7:32) considering 2023 marked the lowest levels ever recorded. Now the growth rate is slightly (7:36) lower than anticipated for the year, but it's still a step in a positive direction. So (7:40) for this week in 2024, we had almost 69,000 new listings at the market in 2023 though (7:45) it was about 62 and in 2022 it was right around 73.
Now purchase application data was also (7:50) up week to week, but still down very much from last year. We are seeing better positive (7:54) sales growth on weekly pending sales data, but this can be partly due to a higher percentage (7:58) of cash buyers in the sales mix that purchase applications usually don't account for just (8:02) means that investors are still buying and they don't often need to go through traditional (8:06) mortgage channels that are tracked. Now here locally in the Dallas Fort Worth area, there (8:09) has been a significant uptick in foreclosures, but not residential foreclosures.
The Dallas (8:13) morning news reported last week that commercial foreclosures were up 129% from this time last (8:19) year. March of 2024 saw 55 commercial foreclosures, at least according to Adam data solutions (8:24) latest research that's compared to just 24 in March of 2023. Now that March sum was enough (8:29) for the fourth largest in the country behind California, New York, and Florida.
And the (8:33) foreclosure auctions for these commercial properties are taking place and investors (8:36) are getting some of these for pennies on the dollar work from home high rates and company (8:40) layoffs have all contributed to the sales of properties. Residential real estate is still (8:44) increasing in value every day, but commercial space all around the state, especially here (8:47) in North Texas is really starting to feel the pain. Don't be surprised if you start (8:50) to see local area banks that fund many of these deals start to feel the pinch as well.
(8:54) This is a market that we definitely need to keep our eye on. Now in the local residential (8:57) market in the last 30 days, homes for sale in the Dallas, Fort Worth area sold for a (9:01) medium price of $406,000. Now this is up almost 2% compared to the same period last year.
(9:06) So prices are still going up. The median price per square foot was about $200. This is up (9:10) 2.1% from last year.
In the last 30 days, there were 8,400 homes sold, which was down (9:15) from 8,800 last year. So sales are declining, but not too much. However, last year was not (9:19) exactly a booming year for sales either.
Now yesterday, the total number of homes for sale (9:23) in the Dallas, Fort Worth area was about 36,000 and that's up 24% compared to last (9:27) year. So listings are going up and this is great for affordability. If that trend continues (9:31) in the last 30 days, almost 11,000 new homes were listed for sale.
This is down about 6% (9:36) from now and when new listings are down, but overall listings are up, that usually just (9:40) means that the homes are sitting a little bit longer. And to my point, the median days (9:42) on market was up to almost 22 days up from almost 20 days. (9:47) Last year, the months of supply was also up to 2.87 up from 1.93 months of inventory last (9:52) year.
So the months of inventory is getting much better than where it was. But remember, (9:56) we still need five to seven months of supply for a balanced housing market. Now, almost (9:59) 21% of homes sold above list price, which is down 7% year over year and a little over 34% (10:04) of the homes listed dropped in price, which is up almost 2% from last year.
And often (10:08) this is just all about how you price the home. Are you pricing it to sell or are you pricing (10:12) it to satisfy the needs of your sellers? Because that ultimately determines if you're going (10:16) to sell above asking or if you're going to sell below. Because as we all know, if the (10:19) house isn't selling, it's always the price.
Okay? So that's the housing market for this (10:23) week. Listings are increasing, but volume is still pretty low, but the trend to lower (10:27) rates might start to swing that as we move into the summer. Only time will tell.
All (10:30) right, I want to give you a quick update on the build a rent story that I did last week (10:32) in my market update. So my main segment for the market update last week focused on bill (10:36) to rent and how it's affecting the longterm health of the U S homeowner. Now the cliff (10:39) notes version of that was that it's not a good trend.
At least if you want to own a (10:43) home one day or build a path to wealth instead of just renting for the rest of your life. (10:46) Well, unfortunately there was more news this week that just worsens that trend. So invitation (10:49) homes, the nation's premier single family home leasing and management company announced (10:53) that they are entering into a joint venture with Katara group, incorporate a wholly owned (10:57) subsidiary of Lenar corporation centerbridge partners LP and other high quality institutional (11:03) investors.
Now as part of their agreement, invitation homes has acquired a minority equity (11:07) interest in a portfolio of single family homes for lease that are part of the upward America (11:12) joint venture. Now upward America has selected invitation homes to provide management services (11:16) to the 4,400 homes located primarily within Florida, Texas and the Carolinas. Stuart Miller, (11:23) the executive chairman and co-chief executive officer of Lenar stated that the shared bill (11:27) to rent vision between Lenar and invitation homes creates opportunities that make single (11:32) family lifestyle and a quality built home more attainable.
Notice he said single family (11:37) lifestyle, not single family home ownership. They're saying that we'll build you a home (11:42) that you can rent. That's not an apartment.
Now Dallas Tanner, the chief executive officer (11:45) for invitation homes stated that including these homes, the total number that we own (11:50) and or manage approaches 110,000 homes through these new relationships and additional efficiencies (11:56) of scale. We believe we can achieve meaningful growth for our stockholders and a significant (12:01) expansion of our premier service and experience for the residents of upward America. Lily (12:06) Habern, the managing director of center bridge, she stated that invitations homes investment (12:10) in the joint venture validates our thesis around the attractiveness of high quality (12:15) new homes concentrated in some of the fastest growing markets in the country.
So this is (12:19) from a press release celebrating this merger of course, but if you're of the mindset that (12:23) the best path to the best neighborhoods and the best America possible is for the majority (12:27) of people to own their homes, well this is not a step in that direction, but instead four (12:33) large companies high-fiving each other for investing in real estate to rent knowing that (12:37) they're cashing in down the road. The American dream of home ownership is alive and well (12:40) only not with American citizens, just with the large American companies who will be renting (12:45) out said homes to all those citizens. And just to prove my point, it took millennials quite (12:49) a bit longer than the previous generations to hit the mark of 50% of them being homeowners.
(12:53) And the way they measure this is by looking at the percentage of each generation that (12:57) were homeowners by the age of 30. And in that metric, just 42% of millennials at age 30 were (13:01) homeowners compared to 48% of Gen Z and 51% of baby boomers when they were the same age, (13:07) according to data compiled by apartment lists. So the numbers are shifting pretty heavily in (13:12) the wrong direction.
This isn't a trend that changes dramatically overnight. It's a slow (13:16) drip, but more and more it is creeping in that less and less Americans are able to afford being (13:20) a homeowner and more and more companies are picking up the slack. So I'm just here to say (13:24) it again, buy real estate because they aren't making any more.
In fact, all the big money (13:29) are making homes that you can't buy. So get what's available while you can. And just to (13:33) illustrate the importance of this, let's chat a little bit about renting versus buying.
So (13:36) the question becomes right now, is it ultimately cheaper to rent or is it ultimately cheaper to (13:42) buy? Well, if you just look at the costs on a monthly basis that you pay to live, being what (13:46) you would pay in rent versus what you would pay for a mortgage, the answer is yes. Right now it's (13:51) cheaper to rent than it is to buy plain and simple. So right here in North Texas, for example, (13:54) for a two bedroom apartment, it costs about 1900 a month to rent, but for a three bedroom, (13:59) single family home, that number is closer to 2,500.
However, if you get a mortgage right now (14:03) on an average price home in North Texas, which is about $378,000, your mortgage with taxes, (14:09) insurance, and mortgage insurance, because not everybody has 20% to put down with an interest (14:14) rate of say 7%. Well, that mortgage payment is going to be about $3,400 a month. And by the (14:18) way, I'm estimating taxes and insurance in realistic ranges.
There's a lot of online (14:21) mortgage calculators out there that way underestimate insurance and often underestimate (14:25) taxes as well. So be careful when you're using those online calculators to figure out these (14:29) payment numbers, especially with insurance being sky high right now, which I'm sure many of you (14:32) are feeling. So let's assume that we're factoring out living in an apartment, which for most people, (14:36) especially with families don't want to do if they don't have to.
And we're just going to focus on (14:40) renting a single family home versus buying one. So we're looking at a difference of close to (14:43) a thousand dollars a month. It's about 900, but there's a lot of variables here.
So let's round (14:48) up and say that it's about a thousand dollars a month cheaper on a monthly basis to rent versus (14:51) buy. 2,500 to rent 3,500 to buy. Arguments settled.
Yes. Well, not exactly because although (14:56) right now at this moment in time, it is cheaper when you scale it out over 10 years, things get a (15:02) lot more interesting. Let's start with rent.
So from April of 2023 to April of 2024, single family (15:07) rents increased by 5% on average across the country and in North Texas. This is according (15:12) to Zillow. Now you will see places where rent increases are less, but remember that number (15:17) often includes apartments, which a lot of new apartments are being built right now and coming (15:21) online and rents for those are expected to decline a little bit until the supply eases up.
But single (15:25) family homes are not in that same category. And for this example, again, we're talking about (15:29) single family homes in a desired North Texas area where many people are moving to. So with a 5% (15:34) increase in rent over the next 10 years, where does that put your rent? Well, it puts it at close (15:38) to $4,000 for a three bedroom house in 2034.
If that trend continues. Oh, and by the way, you have (15:44) no equity, no ownership, and you probably had to move a couple of times because of landlords, (15:48) home sales, schools, et cetera. But I'm being very generous today.
And let's say that your rent only (15:52) goes up to 3,500. All right, let's check back in on the mortgage. So the payment that you took (15:56) out today is $3,500 at a 7% interest rate.
But since I'm being nice here, let's say that your (16:01) rate never changed. You never refinanced, but your taxes went up and your insurance went up. (16:05) And in 10 years or so your mortgage payments closer to $4,000.
So in 10 years, your rent is (16:10) still about $500 a month cheaper than owning. If of course rates never come down and you never (16:15) refinance. But what about the home itself? Well, during the worst real estate sales growth in 30 (16:20) years from 2023 to 2024, we saw home values increased by about 5% nationwide.
So that house (16:26) you paid 378,000 for today is now worth about $675,000 in 10 years at a 5% appreciation rate. (16:34) But again, let's be generous and say that the appreciation was only 4%. It'd be worth about (16:38) $570,000.
So in 10 years, if you never refinance to a lower rate, which most likely will have, (16:44) but either way, your loan amount would be about $304,000 and your home would be worth about (16:49) $570,000. That's over $266,000 in equity. You now have in that house because you owned it.
(16:55) You didn't rent. That's $26,000 a year that you're losing because right now it's cheaper to rent (17:00) than it is to buy. Now, again, to be fair, there are things like costs to buy and sell repairs and (17:05) and the cashflow difference from what you were paying in rent versus what you were paying on (17:09) your mortgage.
But let's say all that cost and cashflow reduction got you to about (17:13) 200,000 net gain from buying after 10 years. That's still 200,000 you got by just owning (17:18) your home. That's long-term for short-term thinking.
And remember, I'm being very (17:21) conservative on these numbers and saying that at no point did you refinance your loan to say 5% (17:26) in two to three years, which is very possible. And Oh, by the way, that net gain gets even way (17:30) higher at that point, almost 30% more. Now I harp on this each week on the show (17:33) about the threats coming in to buy up real estate and make it harder for the average consumer to buy.
(17:38) But I do that because I know the value of owning a home and how given enough time, (17:42) it can be one of the best investments that a single American can make. Because there's a (17:46) reason that all the big corporations that big money are fighting over who's going to have (17:49) the supremacy in the real estate market. They understand the value and stability of the (17:52) largest asset that most people will ever own.
And I know it can be a stretch to make it work (17:56) financially when times are tough and it isn't an easy ask for many people. But if you do not own (18:01) your home, but really want to, or you have clients that are on the fence, share this (18:05) information with them. It could be the key to their financial.
Well guys, that's all for today. (18:09) Rates are starting to ease inventories growing, but if rates fall much more, you'll see much more (18:15) buying activity. And that could lead to higher prices.
Large companies are buying and building (18:19) homes at ever increasing numbers. So if you have clients who are thinking about buying anytime soon (18:23) now is as good a time as any, you know, by the way, there are a lot of programs out there that (18:26) can help with cash. There's not a ton to help with rates, but rates will get better.
It may (18:31) be a few years, but they will improve. But as I showed you, home prices keep going up at a slower (18:36) pace than they have. Thank goodness, but going up nonetheless.
So show your clients the math and (18:41) help them understand short-term pain or long-term gain. And if you need help, give me a call and I (18:45) can walk you through it too. I'm happy to help you or your clients in any way that I can also join (18:49) me live on Thursday as I welcome Chris Heller to the podcast.
Chris is the president of OJO, (18:54) an Austin based tech company, helping buyers and sellers navigate the complex real estate (18:58) landscape, helping connect them to realtors and vendors in all other aspects of their home buying (19:01) journey. And he's going to be here to tell us all about it. So tune in and find out what OJO is all (19:05) about until then be good humans and keep grinding.
Life is what you make it. So make it great. See (19:09) you next time.