We were once again fortunate to have Empire Title’s Bill McAfee on the show with us this week. He offered a great update on the Colorado Springs and Denver real estate markets with his typical blend of wit and insight. Most notable was the contrast between the two real estate markets, with Denver seeing higher demand in the higher-end brackets than we see in Colorado Springs. But even with the differences, both markets are similar in one important respect: they both overwhelmingly favor homeownership over renting.
Bill offered a snapshot of the real estate market, and that snapshot explains why homeowners will find themselves in better financial situations than renters. Inventory is incredibly low and is not moving. The current average days-on-market in Colorado Springs is 106 days; it takes the average home 106 days to sell. While the typical winter slowdown explains some of this, it doesn’t explain everything. Rather, homes aren’t selling quickly at present because demand is depressed. More people are electing to rent. Because of this, many people who are buying new homes are wisely deciding to keep their old home as a rental. Therefore, it never even goes on the market to be counted as inventory.
With lower demand in the housing market, construction companies have reigned in starts on new developments. Supply of new homes is therefore constrained and the cost of renting is driven up since there simply isn’t enough housing in which to put everyone! Competition is also more intense for rental units since leases generally expire every 6-12 months, and a renter can easily be refused a new lease if somebody else decides to out-bid them.
On the purchase side, historically low rates and a softer real estate market have made it relatively inexpensive to own a home for those who can get, or who care to get, financing. Home prices have plateaued since 2013, when a mild, investor-driven buying frenzy caused prices to spike. In some higher-priced brackets, average home prices have actually contracted. It’s a great time to purchase a home since deals are abundant and financing is still cheap by historic standards. FHA has even relaxed its mortgage insurance premiums, so even government-insured loans are cheaper than they were even a few months ago.
These two factors—high demand for rental units and the cheap cost of homeownership—have caused a great disparity between the cost of renting versus owning. This disparity looks set to continue growing as young people put off owning their own home and baby boomers continue to retire—downsizing their current homes while holding onto them as rentals. These disparities become even more pronounced as you move up into larger homes in higher brackets. The difference between renting and owning a 4-bedreem, 3-bathroom home, for example, can be as much as $500 a month!
The reality of renting has always been that you’re basically throwing money away. You aren’t building equity in an appreciating asset. Instead, you’re giving money to someone else, who is building equity in an appreciating asset with your money! This is even truer today since not only are you losing money, you’re paying more to do so! Any wise and prudent individual should consider the realities of renting, the new realities of the purchase market, and plan to get on the right side of the two.
2-28-15 The Realities of Renting