Ted C. Jones is the Chief Economist—Senior Vice President for Stewart Title Guaranty Company in Houston, Texas. Previously, he served as the first director of investor relations for Stewart Information Services Corporation for 17 years, ending in March 2014. Currently, Ted addresses the information needs of internal and external customers, conducts on-going research and supports economic and financial analysis for the company and its customers.
Why is there an urgency to buy a home right now?
There is very limited inventory. We always think that six-month inventory is normal for existing homes. We’re in that mid-four-month inventory range. We know that rents are going to continue to rise. You have the option of either renting or owning. Rents have actually been going up while interest rates have stayed the same or even going lower. Current 30-year fixed mortgage rates are below 4 percent. I can remember when I was purchasing my first house—I had it built, and I was a professor at Texas A&M in the real estate center—and I was thrilled in November of 1989 to close and get 9-3/4 percent, 30-year fixed rate money, because that’s the lowest it had been in over a decade. We’re at the stage now where it’s probably the lowest it’ll ever be for the rest of my life. It’s just below 4 percent, according to Freddie Mac.
The Fed has raised their target rate once and the Federal Open Market Committee is meeting this week. Will they raise rates or not? We don’t know. We truly do believe that as the year progresses, mortgage rates will increase regardless of what the Fed does. So if you want to lock in perhaps your most affordable monthly payments for the next 10, 15, or 30 years, depending on the duration of the loan you pick, then it’s a great time to purchase. Some of the reports last year were that rents went up an average of 4.8 percent, so the quicker you buy, the better off you’re going to be. The forecast is that rents will continue to rise this year at varying levels.
Of course, every market is different. There’s no such thing as a national real estate market or a national real estate economy. You need to look at your local market to see what your rents and home purchases are doing. Many of the studies that have come out in recent months have noted that in all but a handful of cities, if you’re going to be there for three to five or more years, you’re probably better off purchasing than renting.
My forecast is that if 30-year, fixed-rate, conventional loans are 4 percent, I’m expecting that they’ll be between 5.2 and 5.6 percent a year from today. I’m not worried about rising rates hurting home sales, and the reason is that consumers have a significant amount of savings today from energy reduction. But I AM worried about that when rates go up and energy costs rise, it will perhaps put potential home purchasers out of play in the mortgage market.
Why is renting a better option if you’re planning on staying less than three years?
It varies from market to market. We do have transaction costs, and given those costs, if you’re going to be there a year or two, I’m going to tell you to rent. If you move into an entirely new community, why not rent for six months and decide exactly where you want to live anyway? If you’re going to be there less than two years, certainly just look at renting. If you’re going to be there three or more years, purchasing becomes a very top priority for you, perhaps.
What’s going to happen to housing when the rates go up and energy costs rise?
It’s going to exasperate the position of the people who are currently not owners, because if they get priced out of the housing market, then we have greater demand for rentals. That means rents go up even more.
We can overbuild rental markets. I’m sure there are cities across the country—Houston, for example—where we haven’t overbuilt by building too many units. We built too many class A, very expensive apartments. As land costs went up, you can’t build a class B or C apartment, so we’re building class A apartments. And if you’re going to build an A apartment, build in a great location, because location is still everything in real estate. As a result, A rents probably won’t go up, but I’m willing to bet that B and C rents are going to go up significantly because we haven’t built any of those units in the last 20 years.
You always need to talk to that local real estate expert. Those are people who live and breathe and exist and do transactions in those neighborhoods. They understand that market, and those are the people you need to talk to. Your local realtor is the best source that I know of. Like cars evolved, who would have ever imagined what BlueTooth was 20 years ago? Yet today, you get in the car, fire it up, that BlueTooth picks up your phone, you see on your visual display who is calling, and you can do a voice text on the way out. We’re seeing that same innovation is coming into real estate. That will continue to evolve. That will allow us to make better informed buyers and sellers, but none of that negates the need for the real estate professional.