Rent or Buy in California’s Red-Hot Housing Market?

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Brent Bankosky

Many California residents that do not currently own a home are debating the rent vs. buy question as we move into the peak season for real estate transactions across California. There are many factors to consider before deciding which option will be best for you and your family.

California as a whole is one of the nation’s hottest real estate markets.  Along the coast, the rise in home prices has been outpacing the rest of the country since the 2008 recession.  In the state’s hottest real estate markets, growth in prices has exceeded 10% annually for the past 5 years.  For cities and towns in the central valley and foothills of California, home prices have been steady to strong(+5% growth) for the past 3-4 years.

So, the decision should be easy right? Just buy a home!  It’s not so easy though with home prices hitting record levels and a shortage of available homes in many parts of California.  In my current hometown of Modesto, CA, I have been looking for a home to purchase for the past two years.  There are definitely fewer affordable homes available and the prices are considerably higher.  My rent has remained relatively stable.  I fully appreciate that this is not the case for many renters.

Brent Bankosky

There are many factors that go into such an important life decision such as purchasing a home that has been discussed by Consumer Affairs and other websites: https://www.consumeraffairs.com/news/top-10-considerations-when-buying-a-house-061913.html.

Most potential California homeowners are currently renting an apartment, condo or a house where they live today.  In some cases, the monthly rent may be steady and in other cases, you may be experiencing significant increases in your monthly rent costs either annually or when your lease is renewed/extended.  Maybe it is the increase in your monthly rent that has you looking to buy a home in the near future.  If your rent is increasing and you plan to stay in your home for at least 5 years, now may be a good time to look for that home that you want. However, if your rent is affordable and the increased rent is not outpacing your annual income growth, there may not be a great reason to jump into the red-hot California housing market right now.

Mortgage interest rates for 30-year fixed rate mortgages are reaching 7-year highs as reported recently by Freddie Mac: https://www.reuters.com/article/us-usa-mortgages-freddie-mac/u-s-30-year-mortgage-rates-hit-7-year-peak-freddie-mac-idUSKCN1II23M.  This is an important consideration because your monthly payments will be higher as interest rates rise (prior to locking in a fixed interest rate mortgage).  Most economists expect interest rates to rise further and the US 10-Year Treasury Yield has recently eclipsed 3% which is closely linked to mortgage interest rates.  You can watch the 10-Year Treasury Yield at CNBC’s website: https://www.cnbc.com/quotes/?symbol=US10Y.

Keep in mind that on a historical basis, mortgage interest rates are still well below the historical averages.  The annual average rate for a 30-year fixed rate mortgage in the year 2000 was 8.05%, that is about twice the current rate: http://www.freddiemac.com/pmms/pmms30.html.

Another important new consideration is the SALT (state and local income tax) deduction.  Under the new federal tax plan, individual taxpayers who itemize will be able to deduct up to $10,000 annually on their state income, sales and property taxes.  This deduction was unlimited as related to property tax and may be important to consider if your combined state and property tax is or will be >$10,000.  California is one of the highest tax states so your federal tax deduction on real estate taxes paid may be lower than anticipated.  You should definitely keep this in mind when considering whether to purchase a home.  I suggest that you meet with a tax advisor to help put this into perspective before signing the documents to purchase a home.

There are many more personal considerations to evaluate when deciding whether to continue to rent or to buy a home. There is no doubt that California home prices have been steady at a minimum and strong in many areas across the state.  The real estate market is susceptible to economic recessions as you know, so keep a long-term perspective in mind and have a plan just in case.  I can’t stress that point enough, put away at least 6 months of living expenses so you don’t need to act immediately.  The decision to rent vs. buy is personal and ultimately you will make the best decision for yourself and your family.  Happy hunting!

Rent or Buy in California’s Red-Hot Housing Market?unratedBrent Bankosky2018-06-25 08:54:01Many California residents that do not currently own a home are debating the rent vs. buy question as we move into the peak season for real estate tran…

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