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Here’s how the rental market impacts the home-buying market.
Key points
- The more expensive rentals become, the more people who would rather buy a home.
- Economic trends are cyclical, so keep an eye on the rental factor.
While rising interest rates have reduced the number of bidders on homes in some areas, the housing market remains red-hot. Not only are home buyers paying over asking price in most markets, they’re also waiving home appraisals and inspections. While it’s easy to declare that this level of over-enthusiasm is unsustainable, it is impossible to say when it will end.
That’s why we’ve turned to the past to look for clues, for a pattern of some kind that would signal an upcoming bubble burst. And here’s what we found.
The ‘usual suspects’ still make a difference
When it comes to housing prices, history shows us that several factors play a role:
- Rising interest rates: The higher the interest rate, the less people can afford to borrow.
- A national economic downturn: When people are losing jobs with no hope of returning to work soon, there’s naturally less interest in taking out new mortgages.
- An influx of new properties: As more houses hit the market, fewer people battle to buy the same homes.
Two out of three aren’t helping
Of the three usual suspects, only one is currently in play — rising interest rates. Despite inflation caused by the global pandemic and war in Ukraine, the U.S. economy is steaming along, and job creation is strong. More people have the money to buy a home, but too few homes are available.
While we would typically expect housing prices to decrease as interest rates increase, that’s not happening now. And it can probably be traced back to the strong economy and hordes of people who want to buy the few homes available.
Those buying today should do so knowing the home they’re bidding on could rapidly lose value. If the market bursts or slowly returns to pre-pandemic values, anyone who overpaid for a house recently is likely to be left owing more on a property than it’s worth.
What is the precursor we should look out for, the clear …….