A U.S. housing market as unstable as the current one hasn’t been seen since 2006, and most recall what happened as a result. The key figure that defines today’s market is the HOAM index (Home Ownership Affordability Monitor) produced by the Atlanta Fed. To drive the point home further, below is more information from Trading Economics1:
The price-to-rent ratio averaged 101.8 nationwide from 1970 to 2023.
In the second quarter of 2022, the ratio reached an all-time high of 141.2.
The last reading in Q4 2023, the ratio is still “high” @ 135…again, mirroring 2006
The price-to-rent ratio is calculated by dividing the median home price in the area you’re looking to buy in by the average dollar amount of renting a comparable home in the same neighborhood. A low ratio indicates people may prefer to buy rather than rent. A high ratio suggests renting is more attractive than
buying.
Currently, the ratio is very high. This highly favors renting in today’s market.
While emotions tend to drive decision-making, we need to rely on data to see financial success. For the current market to correct itself, we need to see:
- Housing Prices Go Down. This could happen, but no time soon, mainly due to the substantial equity people have in their homes today, which gives them no incentive to walk away from their homes as they did during the Financial Crisis, especially the 60% of our country with a mortgage rate of 4% or less.2
- Interest Rates Go Down. This will happen too, but it’s anyone’s guess when. Maybe the Fed will make one reduction this year. And mortgage rates typically follow the 10-year Treasury, which isn’t controlled by the Fed.
- Incomes Go Up. Historic trends reflect that this too will happen, but it will take time.
The key point, however, is that the points mentioned above are not in control of the public, not you, not anyone. But such events guide your life and financial decisions. What I see is there are three types of people in the current market:
The Quitter: Those who have thrown up their hands, complaining about how unfair the market is and have essentially given up
The Patient Saver: Those who save every penny, praying for a market miracle.
The Opportunity Taker: Those who ignore the noise of the crowd and get qualified help to achieve their goal.
The Quitter is out of the housing game. The Patient Saver will get there one day, but often at the expense of any other financial success. The Opportunity Taker is the person who has the best chance of succeeding in the current market. If this sounds like where you stand today, then you’re already ahead of the curve. To begin with, did you know about the HOAM Index, the price-to-rent formula; why should you, unless you’re in the finance world? The alternative: Consider the help of a trusted wealth advisor.
A wealth advisor is someone you can consult with and learn from, who can steer you on the right path to making financial decisions that will last. The beginning of this journey can be just one, no-obligation call away.
Let’s chat: www.juliuswealthadvisors.com, via ([email protected]) or call 201-408-4644.
References:
- TradingEconomics.com – United States Price to Rent Ratio
- Redfin.com – Redfin Report: 89% of People With Mortgages Have an Interest Rate Below 6%, Down From a Record 93% in 2022
Jason Blumstein, CFA® is the CEO & Founder of Julius Wealth Advisors, LLC (www.juliuswealthadvisors.com) a registered investment adviser in Englewood Cliffs, NJ. He is also the host of The Big Bo $how podcast available on YouTube, Spotify and Apple Podcasts. Jason has been investing and educating himself on personal finance since the age of 10. His company aims to elevate your wealth-building game plan with integrity, knowledge and passion, unwaveringly devoted to a collaborative, highly personalized style. Jason currently resides in Englewood with his wife and two kids. He can be reached at 201-408-4644 and/or [email protected].
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