Rates Are Up. Rents Are Up. What Should Buyers Do?

Welcome back to Mortgage Minute. I'm Jeff Harrison. And with me, as always, is Art Alvarez from MortgageWorks. Art, I have to tell you, today's conversation feels a little crazy. The 10-year Treasury pushed above 5.2%. Mortgage rates are elevated. And if that weren't enough, we're hearing stories about renters competing against each other for apartments. Friends of ours have a son who recently moved back to San Francisco from San Diego. He was looking for a roughly 1,000-square-foot apartment. And he ended up in a bidding war for a rental. The final rent? About $7,000 a month. So Art, I have 2 questions. First, is the sky falling? And second, and I think this is the more important question, if someone is paying $5,000, $6,000, or $7,000 a month in rent, should they at least be asking what owning a home could look like instead? And before we're done, I want you to tell us exactly what someone who is tired of renting should do before signing another 1-year lease.

That's a great conversation to have because there are several things happening at the same time. And when people see a headline about Treasury yields or mortgage rates, the natural reaction is, maybe I should just wait. But then they look at the rental market and discover that waiting isn't necessarily cheap either. So no, I don't think the sky is falling. I think this is a market where buyers need to understand the numbers rather than react to headlines.

Let's start with that 10-year Treasury. Most homebuyers aren't sitting at breakfast watching Treasury yields. They just hear, it went above 5.2%, and assume their mortgage is about to become unaffordable. What does that number actually mean to somebody thinking about buying a home?

The 10-year Treasury is important because mortgage rates tend to move in the same general direction, but they're not identical. Mortgage rates are influenced by Treasury yields, inflation expectations, the economy, demand for mortgage-backed securities, and a number of other factors. So when Treasury yields rise sharply, the mortgage market pays attention. But I would never tell a buyer to make a 30-year housing decision based on what happened in the bond market on one particular morning.

So this isn't like looking at the temperature and saying it's 110 degrees today, so it will be 110 forever.

Exactly. Markets move, rates move. The question for the buyer is, what does the transaction look like today? What price can you negotiate? What payment can you afford? What seller concessions might be available? How much cash do you need? And how does buying compare with the alternative, which for a lot of people is renting?

And that's where I think this gets really interesting. Because the old argument was, well, mortgage rates are high, so I'll just rent for another year. But if rent itself is becoming extremely expensive, and in some markets people are actually bidding against each other for apartments, that changes the equation, doesn't it?

It absolutely can. And I want to be careful here. Renting can be the right choice. Somebody may only be staying in an area for a year or 2. They may not be financially ready to buy. They may want flexibility. There are plenty of legitimate reasons to rent. But what I don't want someone to do is assume that renting is automatically the cheaper or safer decision without comparing the numbers. If somebody is paying $5,000 a month in rent, that's $60,000 a year. At $7,000 a month, that's $84,000 a year. That deserves a comparison.

$84,000 in a year. And at the end of that year, you sign another lease.

Correct. Again, that doesn't mean owning automatically wins. Owning has costs too. You have property taxes, insurance, maintenance, potential homeowner association dues, and depending on the property and financing, The monthly payment can be substantial. But if you're already spending that kind of money on rent, I think it makes sense to sit down and ask, what would ownership actually cost me? Not guess, not assume. Run the numbers.

And I think there's another fascinating part of this. It almost feels like the markets have crossed each other. A few years ago, buying a home felt like a bidding war. 10 offers, Over asking price. Very little seller flexibility. Now, in some markets, buyers may have more leverage. At the same time, renters in places like San Francisco can find themselves bidding against each other. Has the leverage shifted?

In some markets, yes. And that's why I think this is such an interesting time. There are purchase markets today where buyers may be able to negotiate. The property may have been sitting longer. The seller may be more motivated. There may be opportunities for a price reduction. There may be seller concessions. There may be closing cost assistance. Depending on the transaction and the loan program, there may be opportunities to use seller contributions toward an allowable rate buydown. So the renter may be competing just to get permission to pay a very high monthly rent, while the homebuyer may be sitting across from a seller who is willing to negotiate That's worth paying attention to.

That's almost backwards. The renter is saying, please take my $7,000 a month, and the buyer might be saying, if I purchase your home, what are you willing to do to help make this deal work?

Exactly. And again, every market and property is different, but buyers shouldn't automatically assume they have no leverage just because mortgage rates are elevated. Sometimes the higher rate environment is part of the reason that leverage exists. Fewer buyers may be competing. That can change the entire negotiation.

Let's take someone who is watching us right now. They're paying maybe $4,000, $5,000, even $6,000 a month in rent. They're frustrated. They want to own, but they look at mortgage rates and say, Art, there is no way I can buy right now. What's the first thing you would tell them?

I'd say, let's find out before you decide. The first thing I want to know is what you're paying in rent today. Then I want to know what monthly payment you would actually be comfortable with, not what you can technically qualify for. What are you comfortable paying? Then we look at income, available cash, credit, debts, and the type of property you're considering. From there, we can start evaluating loan programs and purchase prices.

So step 1 is not Correct.

Step 1 is understanding your financial range. Because otherwise, people often fall in love with homes first and then try to make the financing fit afterward. I'd rather do it the other way around. Let's establish the numbers. Then you know what you can comfortably shop for.

What about the person who says, I don't have 20% down, so I can't buy?

That's another misconception. 20% down is not required for many loan programs. There are conventional programs with lower down payment options. There are FHA options. There are VA loans for eligible veterans and service members. And there are other programs depending on the borrower's circumstances. The right structure depends on the individual. But I don't want somebody disqualifying themselves before they've even asked the question.

And then there's the down payment versus cash reserves decision. Because I know you've talked about this before. Just because somebody could put every available dollar into the house doesn't necessarily mean they should.

Absolutely. That's something I look at very carefully. Buying a home and having $0 left afterward isn't necessarily a great strategy. You still need reserves. Homes need repairs. Life happens. So we may look at several scenarios. What happens if you put 5% down? 10%? 15%? How does that affect the monthly payment, mortgage insurance, cash remaining after closing? There's no universal answer. You have to model it.

Let me challenge you with something else. A renter might say, fine, maybe I could qualify, but I'm still paying a 7% mortgage rate. Why wouldn't I just rent for another year and wait until rates come down?

And my answer would be, maybe you should. But let's compare the cost of waiting. What will your rent be for that year? Will it increase when you renew? What happens to home prices? What happens to buyer competition if rates decline? What negotiating leverage might you have today that disappears later? Those are unknowns. Waiting is not a neutral decision. It has a cost too.

That's a powerful phrase. Waiting has a cost too.

It does. Sometimes waiting is absolutely the right decision, but it should be a decision, not a default reaction.

Let's talk about seller concessions for a minute, because this is where somebody paying high rent might not realize what's happening on the purchase side. What could a seller potentially do to help a buyer?

Depending on the transaction and loan program, the seller may be able to contribute toward allowable closing costs. They may agree to repairs. They may reduce the purchase price. And in some situations, seller funds may be used toward an allowable mortgage rate buydown. The important thing is to involve the financing conversation before the offer is written.

Why before?

Because I want to know what problem we're trying to solve. If the buyer's issue is cash to close, we may structure the offer one way. If the biggest concern is monthly payment, we might look at something else. If the home is simply overpriced, then maybe we focus more heavily on price. But I want the buyer and their real estate agent to understand the financing implications before they decide what to request from the seller.

So for somebody who says, I'm tired of renting, what would your 4-step plan be?

Number 1, Know what you're spending today. Add up the real cost of renting— rent, parking, storage, pet fees, whatever applies. Determine what ownership payment you would actually be comfortable with. Find out what financing options you qualify for and how much cash you really need. Then look at the purchase market and negotiate intelligently. Don't assume the asking price is the entire conversation.

And I want to add one more because I know you well enough now. Number 5, talk to Art before you sign another lease.

I'd be happy to have the conversation. Even if somebody ultimately decides renting still makes sense, at least they'll know why.

And that's really the heart of today's show. Mortgage rates are elevated, rents are elevated, and depending on where you live, the rental market may actually be more competitive than the purchase market. So don't assume, compare. If you're about to sign another 1-year lease for $5,000, $6,000, maybe even $7,000 a month, take an hour before you do it and find out what owning could look like. You may discover buying doesn't make sense yet, or you may discover you're much closer to homeownership than you thought. And remember, Art Alvarez and MortgageWorks can help with financing throughout the Coachella Valley and anywhere in California. So whether you're here in Palm Springs, Palm Desert, La Quinta, Rancho Mirage, elsewhere in Southern California, San Francisco, San Diego, Sacramento, anywhere in the state, contact Art before you sign that next expensive 1-year lease. At $5,000 to $7,000 a month, that's a pretty important conversation to have. Art, great information today.

Thanks, Jeff. Always happy to help people understand their options.

And thank you for joining us. We'll see you next time on Mortgage Minute.