NerdWallet's Smart Money Podcast - Money News: Should You Rent or Buy Amid Rising Interest Rates?

Episode Date: November 1, 2023

Understand the costs of renting versus buying a home. Plus: the UAW strike, GDP growth, debit card fees, and AI policy. Before discussing housing affordability, hosts Sean Pyles and Anna Helhoski review noteworthy financial headlines, including an update on the UAW strike against major US automakers, the latest Commerce Department numbers on GDP growth, debit card merchant fees, and the White House’s wide-ranging executive order pertaining to artificial intelligence. Then, Sean and Anna welcome Jeff Tucker, a senior economist at the real estate website Zillow, to discuss the impact that rising interest rates could have on your decision to rent or buy a home. Jeff provides historical context, explains the factors contributing to the gap between renting and buying costs, and touches on the challenges faced by first-time homebuyers. The discussion also explores the impact of housing inventory on the market, including whether homes are pulled off the market or remain unsold for extended periods. In their conversation, the Nerds discuss: United Auto Workers (UAW) strike, GDP growth, debit card fees, AI Executive Order, housing affordability, renting vs. buying, personal finance, financial news, interest rates, inflation, mortgage rates, the economy, housing market, rental costs, down payments, homebuyers, housing inventory, AI technology, tech regulations, consumer spending, interest rate hikes, bank fees, and home ownership. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Anna Helhosky. And this is our weekly personal finance news roundup, where we take a look at recent developments in the world of money, and then go in depth on an issue that's important to your life and your bottom line. Today, we're looking at what it costs to rent versus buy the place you live in. There are a lot of factors that go into that decision, but the home buying market is so bonkers these days that the math is very different from what it was even a year ago. We'll have an expert from Zillow here to explain.

But first, a few money headlines from the last few days. So Sean, in our very first episode of Money News, we did a long segment about the UAW strike against the three major U.S. automakers. That was back in early September. Now it's November, and it looks like there's a tentative agreement that could end the strike. Yes. In the last week or so, we saw both Ford Motor and Stellantis reach tentative agreements, and now General Motors looks like it's got a deal. Union workers will reportedly get a 25% pay hike over the next four and a half years, assuming they ratify the contract. That would raise the top wage from $32 an hour to more than $40 an hour, or about $84,000

a year for a 40-hour workweek. So as you said, union membership still has to ratify the contracts. But one knock on effect of all this is that auto workers at other non-union companies, Tesla, Honda, any car companies with plants in the US could say, hey, wait a minute, I want that too. We've been talking about this for a few weeks now, but there's another proof point to the discussion about inflation. Last week, the Commerce Department reported that the gross domestic product grew at an annual rate of 4.9% in the third quarter. That's July to September. It's preliminary data, so it might change, but that's a pretty good clip and reflects increases in consumer spending, private investment, exports, and government

spending at all levels. Yeah, and that 4.9% annual growth is twice what it was in the second quarter of this year. Sean, you mentioned inflation, which has been slowing, and that means our dollars have more oomph, making it easier to spend them. But the remarkable thing is that all this spending is happening while interest rates are the highest they've been in 15 years. And as we noted in last week's show, the Fed is meeting this week, as we taped this show, in fact, to decide whether to leave interest rates unchanged or make another move. All of this data is going to make their job harder or easier. I don't know. But suffice it to say it's complicated. But it's also pretty clear that the economy is not headed into a recession, at least not at the moment. Not with this kind of spending. Sean, listeners may remember we talked a couple weeks ago about efforts by the Biden

administration to tamp down junk fees. Yeah, everything from so-called resort fees at hotels and various airline fees to bank overdraft fees and even student loan fees. Exactly. Well, now the Fed is getting into the act, but this time it's about fees that merchants pay when we use our debit cards to buy stuff. Our debit cards, not credit cards. Correct. This is when we use a debit card and the money comes straight out of our bank accounts. Well, banks charge fees to merchants who take debit as a form of payment. They're called interchange fees. And the Fed is proposing to cut those fees by around 30%. Good news for merchants, not so great news for the banks. And what about us consumers, the people who are buying stuff with debit cards? If these fees go down, will the price we pay go down too? That's not clear right now. Some merchants absolutely pass along the cost of those fees

and the prices they charge. But whether they'll lower prices if the fees drop, banks claim they won't. But that will be up to individual merchants. So when does this happen? Well, it's in the proposal stage right now. So the Fed will open it all up for public comment and then have another vote to make it official if it's approved by Fed governors. And finally, Sean, an effort to rein in our tech overlords. So that AI won't come for my job? Nobody, or should I say nothing, could ever replace you, Sean. But even some of the AI companies themselves have said they need guardrails, and the Biden administration is

taking them at their word. The White House released a wide-ranging executive order that addresses everything from privacy to civil rights to national security. Yes, and this could ultimately have an impact on our finances in multiple ways. First, if you're someone who creates anything from writing to photography to code, the order tells the Commerce Department to come up with ways to authenticate content produced by the federal government and make it obvious when something was created by AI versus by a person. It also tells federal agencies to make sure that when AI algorithms are sweeping through the web, that there are privacy guards in place for how it uses your personal information.

And it also addresses concerns that those same algorithms could end up creating discriminatory practices in, for example, housing sales, as well as ordering the Department of Health and Human Services to make sure AI doesn't create problems in healthcare. There's a lot more, but those are some of the ways this executive order could touch your financial life. That's what we saw and heard about over the past week in Money News. Let us know what we missed and send us headlines you've seen and want to hear more about. And now on to our in-depth look at housing affordability, renting versus buying. So, Sean, you're a homeowner. Dare I ask what rate you've got on your mortgage?

Only if you want to make yourself jealous. It's 3.125%. Well, you can thank your lucky stars or the pandemic that you bought before the Fed started its campaign to raise interest rates because 30-year fixed mortgages hit a 23-year high last week, 8%. Now, as we've talked about before on the show, historically, that's still not ridiculously high, but in the context of the last, oh, three years, it's a rocket to the moon. Yeah. So the last time rates were this high was the year 2000. I was nine years old. It was the time of PlayStation 2, the first crew to the International Space Station, and Bush v. Gore. So yeah, a while ago. And buying a home is so expensive now that in some surveys,

it's more than double the price of renting. So we're going to explore what that means and how listeners can find out whether to buy or rent here at the end of 2023. And we're going to talk with Jeff Tucker. He's a senior economist at the real estate website Zillow. Jeff Tucker, welcome to Smart Money. Thanks for having me on. It's great to be here. So as most of us have heard, the home buying market has faced multiple headwinds over the last year and a half or so, mostly because of a spike in mortgage interest rates. In theory,

that would usually mean a spike in rents as well as home buyers wait out the market. But a new report from the commercial real estate firm CBRE shows the average monthly mortgage payment is more than 50% higher than the average rent. Now, Jeff, I know you're not going to speak to that firm's particular data, but what are you seeing out there? Is it comparable? Yeah, I think directionally, this report is right on the money that the cost of homeownership has skyrocketed so much more quickly than the cost of rent in the last couple of years that it has really tilted the playing field from what had been fairly even in many ways in terms of the monthly cost of ownership versus

renting to now being much more expensive on a monthly basis in many scenarios to be paying a mortgage now than it is to be paying the rent. So when we run our numbers, kind of look at the typical home value nationwide and plug in the going mortgage rate today, we're seeing a monthly mortgage payment of a little over $2,500. That's if someone just put down 5%. And so that's about 23% more than our national rent level, which is just over $2,000 right now. So that's still a really significant gap. And I think what's especially striking is that it's essentially flipped from this time four years ago, when it was 24% cheaper to be paying a monthly mortgage than the typical national rent. And we know that

interest rates are primarily driving this, right? But what other factors are contributing to this wide gap? Yeah, that's right. Mortgage rates are the prime culprit. They've gone from actually a bit under 3% a couple of years ago to really around 8%, give or take at the time we're recording this. They've also been very volatile, which itself is making things difficult for home buyers to kind of predict and budget appropriately if the mortgage rate might change 50 basis points, you know, half a percentage point, just in the process of touring some open houses over a couple of weeks. The other big factor, though, is the price of homes. That sale price

has increased really substantially in the last few years. We saw a really unprecedented, rapid run-up in prices earlier in the pandemic that was fueled by rising demand, as it seemed like people were putting a greater emphasis on the time they spent at home, the space they needed at home. At the same time that there was sort of a lot of fuel for that change in demand, thanks to this large millennial cohort. There's just an unusually large number of people born around 1990 and the years around that. So they were right on the cusp of coming into homeownership, that age range when Americans tend to transition from renting to owning. So I think a lot of them kind of got this push to make that leap. Meanwhile, on the supply side, the housing market

has just been underbuilt since the home building industry was decimated in the Great Recession. So it was really a perfect storm of factors to push up prices. And I think sort of the cherry on top there was a lot of them had supercharged buying budgets thanks to those 3% interest rates. So that helped people kind of get over that hurdle of high prices at the time. That help is gone now though for the folks at this point trying to get into the market. So it sounds like with what you were saying about millennials that this particular time, it's more difficult for would-be first-time homebuyers to have enough money for a down payment. Is that accurate? Yeah, I'm glad you brought up down payments since I've really sort of been

talking in terms of that monthly mortgage payment so far. But the other part of the picture is if you're targeting a particular percent down payment, well, these higher prices are making that harder as well. So I think there is no question that it is harder now to save up for that down payment, well, these higher prices are making that harder as well. So I think there is no question that it is harder now to save up for that down payment. And in fact, when we try to calculate how many years it would take to save up a down payment at typical American savings rates, which are really often in the single digit percentages, it's bleak. To put it frankly, you start to get numbers like nine or 10 years, which at that point is not really realistic because who even knows what the market would have done or where you've gone in your life in the span of nine or 10 years.

So in a growing number of cases, what we're seeing is that the folks who are able to put up a down payment are getting help in many cases from their family, the bank of mom and dad. It's also important to remember the availability of down payment assistance programs. So there are many state and local and nonprofit funded programs that make a really big difference at putting up some of that down payment, especially for first-time buyers, especially for vets and active duty service members. There are a lot of programs like that available. And I think one other thing that I recommend people keep in mind is that a 20% down payment is not at all necessary to buy your first home. And it's not even that common to buy

your first home. In fact, it's much more common to put down a smaller down payment. Switching gears here, we know that there are fewer homes that are being purchased right now. How does inventory affect all of this? Are homeowners pulling their houses off the market because they can't get sales or are houses just sitting for sale for long periods of time? Inventory has been really for the last few years throughout the pandemic, inventory has gotten unusually low. And I think something striking in the last year or so

was that initially when mortgage rates climbed and the market first cooled off in summer 2022, we did see a buildup of inventory. We saw some of that process you described of homes lingering on the market for longer and longer. And that looked like this kind of cool down that the market needed. And then that process stopped. The main reason for that was that the flow of new listings, sometimes I think of inventory as kind of how much water is in the reservoir and how many new listings hit the market every week is

the river flowing into that reservoir. Well, the flow in that river shut off to an extraordinary extent. It dropped somewhere in the ballpark of 30% on an ongoing basis for several months starting last fall, as I think a lot of homeowners kind of got the message, okay, it's no longer the best time ever to sell a home. And I think a lot of them thought, hey, my 3% mortgage on this house is itself a very valuable asset now. It's an endangered species to have debt at such a low carrying cost. So as homeowners pulled back, it recreated that condition of scarcity in the market this spring and summer of 2023. Maybe where I'll close with that is that there's kind of a little glimmer of hope at the moment. This fall, we do see a somewhat more abundant supply of homes. So the buyers who

go out there are seeing less competition and a bit more of a chance to kind of have their pick, look at some listings that have been on the market for a few weeks, and maybe even get some concessions like closing costs thrown in by the seller. That's definitely good news if you're a prospective buyer. But for some buyers that are feeling a little nervous still about those interest rates, maybe they don't want to take that on. You know, they are going to still be renting as we had kind of started off this conversation talking about. So normally you'd see rents rising because of higher demand, right? People decide to hold off on buying a home and

they turn to renting. But meanwhile, landlords see the increased demand and then they jack up the rent too. But it seems that even if those rates are going up, they're not even close to touching what it's going to still cost to buy a home. I think in many parts of the country, it is much more affordable on a monthly basis to just keep paying that rent than to jump over and buy a home and pay that mortgage instead. And that is that is a pretty stunning reversal from how things looked, say, four years ago. At that time, when I look at the 50 biggest metro areas in the country and wind the clock back to this time, September 2019, there were just 17 markets out of those

top 50. So about a third of them where a monthly mortgage payment was more expensive than local rent. And now today, that mortgage payment is more expensive in all 50 of the top metro areas. Is there anything keeping rents from skyrocketing that we haven't gone over? Yeah. On the supply side, it does help that we've been building a lot of apartments. There was a major multifamily construction wave building in the late 2010s, and it actually kept up steam into the pandemic. And that is bearing fruit of delivering more and more apartment buildings to the market, whose owners and managers are very keen to lease them up to get all those units filled. So they offer concessions. That's a bit of a pressure relief valve on the market, adding a bit of competitive pressure between landlords. I think the other factor holding rent growth back has been renters'

willingness to say no to rent increases or to just turn down a move across town because they are trying to shepherd their own monthly budgets more carefully now. And the benefit of that is that that does help keep rent growth in check. All right. Let's talk about how our listeners can make sense of all of this and maybe help with some decision making. Can you walk us through what kind of factors people should consider when they're deciding whether to enter the home buying market or keep renting? Yeah, I think the first question you need to ask yourself is how long do you plan to live in your next home? And how confident can you be that your life circumstances will keep you there? And in general, the longer you're planning to stay, the longer you want to be in that one spot, the more likely it is that homeownership would make sense there. Because there are

substantial one-time costs to moving in and moving out and selling that home, generally, we think of it as a break-even horizon, meaning a certain duration of time beyond which, in purely dollars and cents terms, it would make more financial sense to be an owner if you're going to be there that long. On the flip side, if you want to be more flexible, if you don't need to be in that particular home for the long haul, or if you don't think it will fit your family for more than a couple of years, then it probably still makes more sense to rent. So I think those are the kind of qualitative factors that are really important. And then in quantitative terms, yeah, you want to start to

really dive into the finances of buying a home. That is where it's a great idea to go to online calculators. NerdWallet has a bunch of great ones. Zillow has calculators as well for trying to compute that monthly budget to make sure that you set something realistic and don't just necessarily go for the maximum that a loan officer will qualify you for. You want to be spending a monthly payment that you are comfortable with, that leaves you room to meet your own financial goals, your other spending needs, and your saving needs that that monthly paycheck has to go to. Well, thanks for the plug, Jeff. Appreciate it. Jeff Tucker is a senior economist at Zillow. Jeff, thanks so much for helping us out today. Thank you so much for having me on.

That's it for this week's Money News. But listener, before we wrap up, I want to let you know that we are running another book giveaway sweepstakes ahead of our next Nerdy Book Club episode. This time around, we're speaking with Farnoosh Tarabi, author of the book A Healthy State of Panic, which is about learning to use your fear as a superpower and to make better decisions when it comes to your finances, career, and life. To enter for a chance to win our book giveaway, send an email to podcast at nerdwallet.com with the subject book sweepstakes during the sweepstakes period. Entries must be received by 1159 p.m. Pacific time on November 29th. Include the following information, your first and last name, email address, zip code, and phone number. For more information, please visit our official sweepstakes

rules page. Today's episode was produced by Tess Vigeland and edited by Rick Vanderknecht. Kevin Tidmarsh mixed our audio. And here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.