WSJ Your Money Briefing - Mortgage Rates Have Fallen, but Many Renters Still Can’t Afford to Buy

Episode Date: October 3, 2024

The average 30-year mortgage rate has fallen more than a full percentage point over the past year, but many renters remain priced out of the housing market. Wall Street Journal personal finance reporter Veronica Dagher joins host J.R. Whalen to discuss how far economists say mortgage rates have to come down for paying a mortgage to be less expensive than renting . Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Exchanges. The Goldman Sachs podcast featuring exchanges on the forces driving the markets and the economy. Exchanges between the leading minds at Goldman Sachs. New episodes every week. Listen now. Here's your money briefing for Thursday, October 3rd. I'm JR Whalen for the Wall Street Journal. Renters and prospective home buyers have been waiting and waiting for mortgage rates to come down in order to enter the housing market. But even though rates have dropped more than a full percentage point over the past 12 months, the math is still stacked against them. They are a little fed up because they feel like they've nowhere to go. If you want to be a homeowner and you don't have that option, it's frustrating. Also, if you're in

a situation where you can't wait for mortgage rates to drop, if you have to move, say you're having another baby or you just got divorced and you need to start over in a new place, this is a really tough situation. How much further do mortgage rates have to come down for it to make sense to go from renting to buying? We'll ask Wall Street Journal personal finance reporter Veronica Dagger after the break. How do stop losses work on Kraken? Let's say I have a birthday party on Wednesday night, but an important meeting Thursday morning.

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Veronica Dagger joins me. Veronica, 30-year mortgage rates are averaging just over 6%, a full percentage point lower than a year ago. Let's start with renters. Why hasn't that been enough to bring them into the buyer's market? Home prices aren't low enough for them to take action. Mortgage rates aren't low enough for them to take action.

Essentially, the difference between buying and renting is still significant. enough for them to take action. Mortgage rates aren't low enough for them to take action. Essentially the difference between buying and renting is still significant. And so it's still essentially cheaper to rent in most areas of the country than it is to buy. And you're talking hundreds of dollars every month cheaper to rent than it is to buy. And until that equation changes, most renters are saying, you know, no thanks, I'm good where I am. The Federal Reserve is expected to continue to lower interest rates, which in turn could cause mortgage rates

to come down further. How are renters planning for that? Many renters are waiting to see what happens with rates in the next year or two. So several are choosing to stay put. 62% of renters renewed their leases in the second quarter of this year, and that was up from 60.5% a year ago,

and that's a stat from Rent Cafe. So people are not seeing the math working for them, and they're not rushing out of their apartments. And some people are saying, you know what, maybe I wanna be a lifetime renter. Maybe I wanna stay in my apartment for the long term and take the money I would have put towards a house and put it in the stock market where I'm probably going to perform better anyway.

You spoke to an economist who said that mortgage rates would have to fall to about five and a quarter percent, about one percentage point lower than where they are now, for it to make sense for renters to buy. Why that number? Well, if you look at a 30-year fixed mortgage, he's saying rates need to fall that much for the monthly payment on a $419,000 home to close in on the average US rent of about $1,800 or so. And so it's pretty far apart because right now, as you know, mortgage rates are about 6.08%. And he's saying you'd need to drop all the way to 5.25. Well, most economists don't see that happening anytime soon.

Most people don't even see that happening in the next two years. And so renters are having to do this calculus of maybe it's better off for me to renew my lease for another year or two, wait things out, and then see where rates leave us in a couple of years from now. So it could take another year or two for rates to come down to 5.25%? No economist knows really what's going to happen, and so it could take a long time for rates to come down. They may be stuck pretty much where they are for at least another year or two.

It's unclear. So that's why it's important for people to think about what home they can afford now at the current rate. Because if you're buying a home with the idea that I'll be able to refinance sometime soon, and that sometime soon is not going to happen for another three or four years, then it's probably not a good idea for you to buy the home if you can't afford it. So making predictions, making housing decisions on where you think rates are going to be is a dangerous game. You spoke to some renters. What's their experience been?

There's a lot of frustration for some folks who really want to buy and can't because they can't afford the prices or the mortgage rate. They are a little fed up because they feel like they've nowhere to go. Yes, they may like their current situation and the amenities that some of their buildings may offer, like the pool or the gym. But at the same time, if you want to be a homeowner and you don't have that option, it's frustrating. Also, if you're in a situation where you can't wait for mortgage rates to drop, if you have to move,

say you're having another baby or you just got divorced and you need to start over in a new place. This is a really tough situation. This is a tough market to be trying to buy a home in if you have to just because there still isn't a lot of homes for sale. In your story, you mentioned that people could use a rent versus buy calculator. How could that help them? It's a good way to get a general direction of how much you can afford, get a barometer

of what your expenses are and what you can afford given your budget today, what kind of house you would be able to foot the monthly payments for. And it's a good place to start. Now, a lot of these buy versus rent calculators don't give you a full picture. Expenses between homeowners and renters can be very different. So homeowners that, you know, have to come up with a big down payment sometimes to even get in the door. And then you face rising bills for things like insurance and taxes and utilities and repairs that which you may not be able to avoid. Renters have bills to they have insurance to that they'll need to take on,

but they have more flexibility. They can pick up and leave at the end of their lease if they wish. They can move across the country and not have to worry about property taxes. Granted, some of that might be built into their rent, but at the same time, they have a level of flexibility and freedom that owners don't have.

Of course, owners have the ability to build up home equity The more they pay down their mortgage the more they own their house Where renters the long time expression with that is throwing your rent in the garbage You're not building up your own wealth when you are renting and so that is discouraging for some people And you also don't have the benefit of a fixed monthly payment. Often your rent is going to go up every year and as you get older that can be tricky if you're on a fixed income or you don't have as much regular income coming in. That can be difficult to deal with big rent increases if you're not an

owner. So there's pros and cons with both. That's WSJ reporter Veronica Dagger and that's it for your money briefing. We'll be back tomorrow with WSJ's Imani Moise to discuss why attractive rates on many high-yielding CDs could be going away. This episode was produced by Zoe Kolkin with supervising producer Melanie Roy. I'm JR Whalen for The Wall Street Journal. Thanks for listening.