Rent An Apartment Or Buy A Home?

There’s some interesting news at the intersection of what’s always a hot debate – should you rent an apartment or buy a home? 

We’ll get to that, but first …

In such a hot housing market – with record prices and 5%+ mortgage interest rates – there’ll always be a supply of renters. They’ve been priced out of buying at the moment, but still have the cash to populate big urban cores and hot Sunbelt markets. 

This is why we still like high-end apartment REITs (real estate investment trusts) on the weakness they’ve experienced over the last month. 

Source: Google Finance 

The long-term narratives we outlined for Essex Property Trust (ESS), Equity Residential (EQR) and Avalon Bay (AVB) in the March 29th edition of The Juice as well as Camden Property Trust (CPT) on April 27th remain intact. 

All four REITs carry dividend yields of around 3% and focus their rental portfolios in major urban cores (ESS, EQR, AVB) as well as the hottest Sunbelt real estate markets (AVB, CPT). 

Key Takeaways:

• Whether you’re looking to buy or rent, it’s a crazy real estate market. 
• While some prospective homeowners are rushing to get a mortgage, others aren’t in such sound financial positions. 
• If you’re of modest means, think about how being house rich/cash poor might make you feel as you ponder the age old rent or own question. 

Source: Redfin

If that’s not enough to scare off at least some prospective homebuyers, we don’t know what is. 

Between record prices and interest rates firmly situated above 5%, it costs a lot to carry a mortgage. 

Let’s piece that together with some other data:

• Pending home sales dropped 6% in the four weeks leading up to May 8th. That’s the biggest annual decrease since June 2020. 
• There’s a bidding war happening on rentals. For example, in Los Angeles, renters going 10% over asking is common. In some cases, rentals are going for 1.5x the advertised rent. 
• In Austin, amid low inventory, rentals went for 35% above asking, on average, in Q1. 

In most major markets, it takes longer to “break even” on a home purchase than it did pre-pandemic. Break even meaning, according to the Wall Street Journal, “when the estimated net costs of having owned that home match the estimated costs of having rented a typical home over the same period.”

For example, in Austin the average homebuyer hit break even in 3.7 years pre-pandemic versus the present 5.6 years. 

Rushing To Pay More For A Mortgage? 

As with inflation, you might only agonize over the decision to buy a home if the increased costs represent a meaningful hit to your pocketbook. 

It’s not that people earning high incomes and presumably sitting on meaningful amounts of cash don’t care about paying more. It’s that they’re apparently rushing to buy in today’s environment in anticipation of even higher home prices and mortgage rates. 

Proof of this – even as demand falls, the average home only stays on the market for 15 days. That’s an all-time record. 

But not everybody has the personal financial luxury of going this route. They must ask other questions. 

House Rich Or Cash Poor? 

Setting all of this record-setting data aside, prospective homebuyers of modest means almost always have to ask themselves if they can handle the upfront and ongoing costs of home ownership, irrespective of if and when their investment will become profitable. 

Can you afford to put 10% or 20% down on a home? Depending on where you want to buy, that number can reach six figures. Do you even have that kind of cash saved? If not, you might be priced out of the market before you even started. 

At the same time, can you cover not only elevated monthly payments, but property tax (for example, property tax will run you about $1,000 a month on a home around the median in Downtown Austin), closing costs and planned as well as unplanned maintenance?

Will you feel cash secure if you find yourself in an all too typical house rich, cash poor situation? 

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The Bottom Line: History shows that real estate has been one of the best investments you can make. 

However, for many people, a home represents a place to live – forever. 

If this is you, and you don’t exactly have a ton of money saved and coming in, the question of home ownership comes down to cash security. Will the costs of home ownership, particularly in today’s environment, turn the screws on your monthly budget, resulting in cutbacks on needs and wants not associated with your property purchase? 

On-paper profits (house rich) don’t mean much if you don’t intend to sell. And, even if you do, you still need a place to live. 

All of these factors matter as you decide whether to rent or jump into this insane housing market. 

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