What Should You Do When House Prices Go Up And Rents Go Down?


When real estate prices rise in a real estate market, rental prices usually rise too. The opposite is the case: when property prices go down, rental prices usually go down too.

Of course, the past year has not been normal in many ways, and the real estate markets are no different. It seems like 2021 will be a good year to rent instead of buy when it comes to housing, but now there’s a twist. Based on an article by Derek Thompson at The AtlanticRental prices have risen in some metropolitan areas in the United States Low while house prices have gone above.

To be clear, this doesn’t happen in every city, but it does in a large number of them. Thompson points out a list of the major subway areas where this has happened in the past year, including Boston, Chicago, New York, San Francisco, San Jose, Seattle, and Washington, DC.

Does this strange situation change the usual advice on renting or buying? Let’s dive in.

The impact on you when rents are lower

Rent usually goes down in areas where there is an excess of uninhabited rental properties. To fill them up, landlords will cut rents to attract new tenants.

Why is this happening? This can happen for a number of reasons. For one thing, there is an economic crisis and people just can’t afford the rent, forcing them to move to areas with lower cost of living. Another reason that is particularly true right now is that many tenants have worked remotely. When working remotely, it doesn’t make very good financial sense to pay a very high rent just to sit at home.

Regardless of what area you live in, if you are a tenant, this can be a good time to start looking for a new place to live or even negotiate a lower rent with your landlord if your lease is due for renewal soon.

The impact on you when you live is greater

Likewise, real estate prices rise when more people search for homes than are available in the market. Just like rent, it’s all about supply and demand, and in most housing markets, demand for housing is currently outweighing supply. As long as demand exceeds supply, property prices will rise.

If you want to buy now, higher home prices mean a bigger mortgage. If you need to stay in your current field, you may want to wait. This could also be the right time to move to a new area with a lower cost of living.

What about mortgage rates?

Mortgage rates are expected to rise slowly over the course of 2021, according to CNBC. The expectation is that they won’t go up quickly, but over the course of a year mortgage rates can go up as much as 0.5%, from rates in the 3.5% range to rates in the 4% range.

What does that mean in dollars and cents? For example, let’s say you are considering buying a home for a 30 year mortgage and need to borrow $ 300,000. At 3.5% your monthly payment is $ 1,347, at 4% your monthly payment jumps to $ 1,432 – around $ 100 more.

That’s enough for a jump where home sales are likely to cool a bit over the course of 2021, as the price differential is enough to keep some people in position.

After 2021, there is a belief that the Federal Reserve will eventually raise interest rates, which will lead to an immediate spike in mortgage rates and further slow the real estate market. This is not expected anytime soon, but it is definitely included in the forecast.

The short-term game plan

So what should you do in the short term?

If you’re in one of those real estate markets where rents are falling but property prices are rising, renting is a relatively good deal. You should try to shop around and set a low rental rate for the next year or two if you commit to staying in the area.

Another option is to seriously consider moving to an area with a lower cost of living, where both rents and housing costs are increasing but much lower than some of the expensive areas listed above.

Either way, you will likely save money on rent compared to buying a house in an expensive area, or you will save money by moving to a cheaper area. So take advantage of this. Set aside money for the future, especially if you have plans to buy a home at some point.

The longer-term game plan

If you are looking to buy beyond 2021, be sure to keep a close eye on what the Federal Reserve is doing and what is happening to inflation. Interest rates are likely to rise if the Fed raises rates. This can happen in 2022 or 2023 when the economy warms and inflation starts to rise.

You either want to pre-approve a mortgage on a low rate mortgage before such an increase occurs, or you want to wait a while for the housing market to cool after a Fed interest rate has increased (and prices are likely to rise in many areas).

In trying to get past a Federal Reserve rate hike, save as much as you can on a down payment so you can hit the trigger on a mortgage beforehand. If not, play the rental market and try to keep your rent as low as possible. If you can, move to an area with lower rental rates.

Another option, of course, is to consider never owning a house and keep playing the loan game. There are real financial benefits to this approach provided you are careful with your expenses.

We appreciate your feedback on this article. Contact us at Inquiries@thesimpledollar.com with comments or questions.


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