Rent Vs. Buy 2024 – Is Housing Still Affordable? - Frederick Real Estate Online (2024)

Housing Affordability in 2024

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RENT VS BUY in 2024…Is housing still affordable?

“2021 was a remarkable year for real estate! Home values in Frederick County increased by almost 20% year over year! We haven’t witnessed such escalation since the mid-2000s. While values rose at a lesser rate in 2022 and 2023, they continued to accelerate. As we witness values rise, many are asking about housing affordability in 2024.

Are you wondering if 2024 is a good year to buy, after all? Usually, the answer is based on several considerations, including economics and your personal finances, goals, and situation. Answering the question is not as simple as a yes or no. But we understand—it’s an important question for first-time buyers.

First, let’s discuss the math of affordability. What exactly does the term “Affordability” mean?

The National Association of Home Builders (NAHB) and Wells Fargo have been calculating the Housing Opportunity Index (HOI) for over 30 years. They release quarterly surveys on two key aspects: income and housing costs. The survey now covers 247 metropolitan areas across the U.S. as well as national averages.

In total, 37.4% of new and existing homes sold between the beginning of July and the end of September were affordable to families earning an adjusted U.S. median income of $96,300 (previously $79,000). This is down from the 40.5% of homes sold in the second quarter of 2023 that were affordable to median-income earners.

This is the lowest reading since NAHB began tracking affordability on a consistent basis in 2012.

This means that 37.4% of Americans can afford to buy a median-priced home. While there is a median home price, what really matters is local prices for your ability to purchase a home.

More on that below.

Affordability has decreased by 16% since last year in most metropolitan areas, primarily due to increasing home values AND rising interest rates. Interest rates greatly affect affordability. Between mid-2022 and January 2023, interest rates doubled.

New Home Construction Most Impacted

New homes have seen the highest price increases. NAHB cites the shortage and rising costs of lumber, and the shortage of skilled workers as the two issues most affecting the cost of building. Supply chain disruptions, lumber availability has been severely affected by the pandemic.

Even with pandemic effects and supply chain woes, existing home sales are the highest they have been since 2006. This 15-year record has been fueled by low mortgage interest rates and strong demand. The inventory fell to the lowest level since January 1999, keeping home prices elevated and pricing out first-time buyers.”

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How is the HOI calculated?

The housing cost calculation takes into consideration the price of homes and the interest rate.

For income, NAHB uses the annual median family income estimates for metropolitan areas published by the Department of Housing and Urban Development. NAHB assumes that a family can afford to spend 28 percent of its gross income on housing; this is a conventional assumption in the lending industry. That share of median income is then divided by twelve to arrive at a monthly figure.

On the cost side, NAHB receives a CD of sales transaction records from CoreLogic every month. The data include information on the state, county, date of sale, and sales price of homes sold. The monthly principal and interest that an owner would pay is based on the assumption of a 30-year fixed-rate mortgage, with a loan for 90 percent of the sales price (i.e., 10 percent down payment). The interest rate is an average of the 30-year fixed effective rate from Freddie Mac’s Primary Mortgage Market Survey during that quarter. In addition to principal and interest, the cost also includes estimated property taxes and property insurance for that home. This is based on metropolitan estimates of tax and insurance rates from the most recent American Community Survey. Mortgage insurance is not currently a component of the HOI.

Therefore, for each record, there is an estimated monthly cost and available income share. The HOI is the share of records in a metropolitan area for which the monthly income available for housing is at or above the monthly cost for that unit.

The Effect of Interest Rates on Affordability

Today’s 6.9% rates* have made an impact on housing affordability. Rising 2-3 percent may seem small, but that rate increase reduces the amount the borrower can spend.

However, these rates are still historically low…Some history:

The average 30-year fixed-rate mortgage hit record lows 16 times in 2020. Then in January 2021, we saw another record low of 2.65%, the lowest level in its nearly 50-year history. As the FED has tried to reduce inflation, we saw interest rates double in six months. They have recently begun to recede, as the FED has stated it will pause on rate hikes, and possibly lower rates throughout the year. Mid-January 2024 the rates are above 6%.

Just to put this in perspective…Only five years ago rates were 4.5%. In the 80’s rates were in the double digits (as high as 16%!), going as high as 18%. In the 90’s rates bumped up and down between 7% and 9.5%. (our first mortgage was 8%!) During the 2000’s we saw 5% and 6% regularly, and we thought it was incredibly low! Some said even too low, fueling the wrong kind of investment. The last decade saw many record lows as rates hovered around 4% for most of the decade.

To understand the impact of interest rates on affordability, read this handy chart: Interest Rates and Home Affordability.

Measuring Income

For income, NAHB uses the annual median family income estimates published by the Department of Housing and Urban Development. They use the figure of 28% of gross income as an average amount that homebuyers can afford to spend on housing.

Divide the 28% of average income by 12 to come up with a monthly amount allowable for a mortgage. This is a much more conservative percentage than most lenders use.

Keep in mind that the FHA guideline maximum debt-to-income ratio is 56.9% with compensating factors. Lenders can, and most lenders will limit maximum debt-to-income to under 55% and some lenders to 45%.

So, affordability calculations are much more conservative than reality. We can truthfully estimate that housing affordability is higher than the HOI reports.

Rent vs buy – explaining housing affordability in Frederick Md

When explaining housing affordability, remember that local markets are different. While the National Affordability Index is at 37.4%, which gives us a view of the way housing costs are trending, that’s not helpful to anyone asking about affordability in their particular location… local markets vary.

Washington DC, NVA, MDHOI

Frederick is considered a sub-market of Washington D.C., yet much more affordable. Washington D.C. has an affordability index of 42.6%. The median family (of 4) income for the area is $$150,000 (according to HUD) the median home price is $555,000. As we move out from Washington D.C., home values decrease, like concentric circles.

Frederick MD HOI

The median income for Frederick Md households is $106,000, according to DataUSA, which uses a broad group of sources, and the median home price in Frederick is roughly $480,000. (DataUSA is incorrect on this statistic).

Without an exact number, we can see that the affordability index for Frederick is higher than Washington D.C., Rockville, and Bethesda, primarily because of home values.

Hagerstown-Martinsburg MD-WV HOI is 56.3%. The median home price is $285,000; the household income is $90,700.

Incidentally, Cumberland Maryland is the most affordable area, where 93.7% of households (with an average income of $89,900) can afford the median-priced home of $125,000.

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Rent Vs. Buy in Frederick MD – Some History

Buying a home is not for everyone all the time; sometimes it’s a good idea for a particular time, sometimes it’s a good idea to wait, and sometimes people shouldn’t buy a home. Whether to rent or buy a home is a personal choice, based on a lot of variables. Sometimes it involves more than just numbers.

Here are some facts and statistics to help you decide when it’s the right time to buy or rent.

Home values were declining from 2006 until the summer of 2012. The first 2 years of decline in home prices were in the double digits, but the next 2 years slowed to less than a 5% decline. Then we saw the leveling off of home values here in Frederick County, and since 2014, we’re experiencing increases in the area. Homes above $600K are increasing at a (slightly) slower pace…(but they have been catching up!) than homes priced under $400K.

The Case for Building Equity Over Time

Let’s dissect the financial side:

At first glance, it looks like renting is cheaper than buying in some areas of the country. The median rent in Frederick, MD is$2,180. This is $180 more than the national median. [Zillow]

The median monthly mortgage payment on a median-priced home of $480,000 is $2,863, which includes taxes and mortgage insurance, assuming a minimum 3.5% down payment.

On a surface evaluation, renting is cheaper.

But consider what you are getting for that payment. If you are renting, you are getting a 2 or 3-bedroom apartment. If you buy, most likely you’ve bought a 3-bedroom townhouse or possibly a small single-family home outside of the city.

This is where the lifestyle choice comes in. Compare what you are getting in a 2 or 3-bedroom apartment with the lifestyle you would have in a 2 or 3-bedroom townhouse.

Incidentally, home ownership in Frederick County is 76%.

Buying Means Staying

Buying a home can be cheaper than renting… if you plan to stay in the home for 5 years in most NORMAL real estate markets, with 3% yearly appreciation. Calculating the costs of ownership, down payment costs, property tax, maintenance, as well as monthly mortgage, it takes about 5 years in most markets to break even if you amortize these costs over the years.

Consider these facts:

• Home values are expected to increase 4-5% annually over the next few years. This is a conservative number, and no one has a crystal ball.
• Rents experienced significant hikes in 2023…8.4%. They are expected to increase by 5% to 7% in 2024. (also conservative) This is simply a matter of supply and demand. Demand for rentals is up.

Rent Vs. Buy: Let’s Do the Math

Let’s look at what happens if we compare our rent and buy scenario for 5 years. Remember, these are very general numbers, rounded for easier calculation.

Rent over 5 years: $144,528 (includes rent increase 5% yearly)

Mortgage Payments over 5 years: $171,780

Difference: $27,000

• Principal paid over 5 years: $32,000
• Home Value in 5 Years: (3% yearly increase): $556,000
• Balance owed on the home after 5 years of payments: $431,000
• Equity in the home after 5 years: $125,000

Rent Paid vs. Mortgage payments: +$27,000
Actual Savings: $125,000 – $27,000 = $97,000

Just to be accurate, let’s subtract the initial 3.5% down payment at the time of purchase, $16,000.

The savings in 5 years is $81,000

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Equity is the Difference

This kind of calculation can only be legitimate in an economy where home values are increasing, not something we experienced in the years between 2008 and 2014. Now we are seeing average and median prices climbing steadily year over year. Economists are calling for appreciation again this year, in most areas of the country. In Frederick MD, we have seen home values increase in all communities and price ranges.

Should I Rent or Buy?

Given the fact that Frederick County is very affordable, compared to metropolitan areas nearby, and given the fact that home values are on the rise, let’s establish that it is generally a good time to get into homeownership. The real questions you must answer are about your personal situation.

For some people, buying a home makes the most sense, and for others, renting is best. It is a well-known fact that for most Americans, owning a home is the main vehicle for building wealth over time. You have to live somewhere, right? When you are paying rent, you are paying someone else’s mortgage.

Here are six questions to help you determine if 2024 is the right time for YOU to buy. Note: Some of the answers might surprise you so read on…

1. Do you have some savings?

Even though there are several zero-down payment programs, you must plan for closing costs and many other one-time expenses as a homeowner. Insufficient savings may not prevent you from buying a home but it is a strong indication that you may not be prepared for the ongoing financial requirements of homeownership.

How much should you have saved? It depends on what price range you are considering, as well as the loan you will be using.

With an FHA-financed loan, you will need to have 3.5% for a down payment. On a $325,000 home that is $11,375.

For most first-time buyers, FHA loans are a great choice, with low downpayment and common sense qualification criteria. But there are also conventional loans and VA loans to consider. The downpayments will vary with each loan and each lender.

Down-Payment Assitance Programs

The Maryland Mortgage Program is a great loan program for first-time buyers (and repeat buyers) in Maryland. The program offers several types of down-payment assistance. As with most state programs, there is an income limit with MMP, which is up to $176,400 (depending on household size and targeted area) for Frederick County. The mortgage rates are very competitive with other loan programs. Be sure to read the details in the linked article, and contact us for an MMP-qualified lender.

You will have some other expenses, like the home inspection, typically $500 to $600.

You may have some closing costs, like origination fees, and fees from the title company, typically 2% to 3% of the purchase price. Sometimes buyers can negotiate with the seller to pay closing costs, but it’s best to be prepared.

Recommended Reading:

How much do you need for a downpayment on a home? Bill Gassett, MA Real Estate Agent, has an informative article explaining downpayments and gives several pros and cons for the size of your downpayment. He’s got several suggestions for coming up with a downpayment.

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2. Are you Creditworthy?

Your credit score is an important asset. Your lender will consider your score as an indication of your creditworthiness. Typically, the higher the score, the lower your interest rate.

Additionally, your credit history is important. While you can always find a lender to lend you money, you’ll pay exorbitantly high rates. Solid lenders are more skeptical if your credit history is not good.

Minimum Scores. While FHA Freddie and Fannie have minimum scores, (A minimum of 580 is necessary to make the minimum down payment of 3.5%.) many lenders have their requirements. (FICO credit scores start at 300 and go up to 850.) Most lenders require a score of 620 to 640 to qualify.

The higher your credit score, the lower the risk you are. The lower the risk you are, the lower your interest rate. Shoot for a high credit score, not a minimum score. Here is some advice on how to build s credit score lenders will love.

3. Is your employment steady?

While we can never predict the future, you probably have a sense of your job or business security. If you’re working for a start-up company, you probably want to wait for a secure situation. The last thing you want is to saddle up with a mortgage and then find yourself unemployed, or underemployed.

4. How much debt do you have?

A lender will calculate your debt-to-income ratio, which is different for each loan product.Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. A conservative number to shoot for is having a mortgage that is 28% of your income. This is called the front-end ratio.

Mostmortgageshave a maximum back-end debt-to-income (DTI) ratioof 43%. The back-end ratio takes all your debt into account. There are some programs with higher front-end and back-end DTI ratios…which make us nervous, to tell the truth.

You can do a quick calculation and decide how you fare in the category of debt.To calculate your debt-to-income ratio, add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is the amount of money you have earned before your taxes and other deductions are taken out.

If you are thinking about a home purchase you’ll want to plan to minimize your debt. You’ll want to consider foregoing a new car purchase, or charging the new furniture on your credit card. You might want to pay down your credit cards and pay off some debts.

This is why we like to say that buying a home is a process, not an event.

Recommended Reading:

Luke Skar, with Madison Mortgage Guys, has a helpful tutorial showing you how to calculate your debt-to-income ratio. The calculations are not difficult, but it is important to remember that each kind of mortgage will have slightly different guidelines for their qualifying DTI ratios.

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5. Are you going to live here for a while?

Again, we can’t tell the future, but you’ll want to be sure that you can stay in your home for a minimum of five years. If you expect to get a job transfer within a few years, you may end up paying money to sell it. You’ll want to make sure your home value increases enough to cover the costs of selling your home.

The length of time that it will take to cover those costs depends on various economic factors in your area. Normal appreciation is considered an average of 3-5% per year. This is considered normal and healthy and should cover selling costs in about five years, given normal conditions.

What we are experiencing since 2020 is NOT normal appreciation. In the last year, we’ve seen approximately 20% appreciation of home values, on average!

Remember, real estate is local. Something to consider: If the area you buy your home in experiences an economic upturn, the length of the time to cover these costs could be shortened, and in the unfortunate circ*mstance of an economic downturn, the opposite is also true.

6. How long will the home meet your needs?

What features do you require in a home to satisfy your lifestyle now? Five years from now? Depending on how long you plan to stay in your home, you’ll want to make sure that the home has the amenities that you’ll need.

For example, a two-bedroom home may be perfect for a young couple with no children. However, if they start a family, they could quickly outgrow the space. Therefore, they should consider a home with room to grow.

While we don’t ever encourage buyers to stretch beyond their comfortable capacity to purchase, we do caution against getting a home that is too small, or that will not suit their needs in the next 5 years.

If the home has room to grow, consider the costs of improvement, or your ability to DIY. Could a basem*nt be turned into a den and extra bedrooms? Could the attic be turned into a master suite or a bonus room? Having an idea of what features you’ll need shortly will help you find a home that will satisfy you for years to come.

7. Are you ready for the responsibility of homeownership?

There are costs and responsibilities with homeownership that most renters are not accustomed to, things the landlord takes care of. Home insurance, home maintenance and repair, appliance replacement, and home maintenance and repairs are all important considerations. Most experts suggest you save 1% of your home’s value every year. Saving for long-term projects, like replacing the roof or the HVAC system, will save you the emergency of the cost of replacement when there is a sudden breakdown of a major system, or the inevitable replacement because of age.

Your home is probably the most expensive purchase you will make in your lifetime. It is a place to build your nest, both figuratively and literally…your financial nest egg. You will want to take care of the maintenance of your home regularly to maintain its best value throughout the years you own it.

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? Have you saved money by putting off your home purchase?

Even though home prices are rising, the cost of buying is still low, compared to past years. Interest rates are the major factor in the cost of a home.

Look how the changing interest rate affects the monthly mortgage:

Is This the Right Time to Buy a Home in Central Maryland?

Once you have considered the finances, your future employment, and your savings, the decision is really about lifestyle. For most Americans, home ownership is the most likely method to build wealth.

It is also a way to create a lifestyle that best suits you and your family. Those intrinsic desires are best accomplished in your own home…paint the walls the way you want, plant a garden, get a swing set, and enjoy the freedom to build a nest, both financially and emotionally.

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Chris Highland, Broker eXp Realty Maryland
Cell: 301-401-5119 Broker: 888-860-7369

Rent vs buy – explaining housing affordability, written by Chris Highland, Associate Broker, eXp Realty. We hope it helps with your homebuying plans!

Our real estate team has spent over 30 years helping people in Frederick County and the surrounding area in Central Maryland determine if homeownership is right for them.

If 2024 is your year, give us a call and we’ll help you find your nest. Contact us for our preferred list of lenders. We can find a loan program that fits your situation.

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