The Housing Market: Rent or Buy?

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.org. While there's no question that we're still feeling the impact of the COVID pandemic, it caused massive disruptions in supply chains and huge spikes in building costs. Housing inventories fell, demand rose, and home prices have gone up. Now, also during that time, young adults were trying to move out of their parents' homes and set up house for themselves, so rental rates also rose. In the age-old debate, rent versus buy, things have shifted. You see, paying a landlord now seems like a better deal than paying a mortgage company with sky-high interest rates and stubborn inflation. In fact, according to the New York Times, rent versus buy has shifted. You see, paying a landlord now seems like a better deal than paying a mortgage company with sky-high interest rates and stubborn inflation. In fact, according to the real estate investment firm CBRE, it's never made less sense for first-time home buyers to make that leap, and here's why. CBRE's research shows that average new monthly mortgage payments are now, get this, 52% higher than the average rent for an apartment. That difference, 52%, is the highest in the 27 years CBRE has been doing this research. There's no question that many first-time home buyers have been priced out of the market.

According to the National Association of Realtors in 2022, the last year this statistic is available, only 26% of buyers were first-timers. That's the lowest percentage since they began tracking those numbers. Of course, home values are expected to moderate, at least that's what the experts say. But that probably won't mean they'll actually decline much. It's more likely they'll just stop increasing so dramatically.

Some analysts say we've reached peak unaffordability. High mortgage rates are supposed to bring values down, but that hasn't happened because of the continuing low inventory. There just aren't that many houses on the market, and that's keeping prices firm in most places. It's tempting to say that rental rates are a bright spot in this picture, but they really aren't.

They're lower now only when compared to average new mortgage payments. Rents also increased a lot in the last few years, just not as dramatically as mortgage payments. For what seemed like decades, Americans heard that buying a home was the smart way to go, and that continuing to rent was just a waste of money because paying rent doesn't build equity while making mortgage payments does.

That's now been flipped around. The new value option, at least for the time being, is to continue paying rent and sit on the sidelines of the home buying game until interest rates come down and inventory goes up. It's interesting to note that analysts aren't sure at this point where the rent-versus-buy debate is heading. Will rents rise to meet mortgage payments, or will mortgage payments drop to meet rental rates?

If you're one of the many wannabe first-time home buyers, and if you're wondering if you'll ever be able to buy a house, you can take some comfort in this. The free market, when left alone, will always correct itself. If there aren't enough homes, builders will build more. If the cost of materials is too high, competition and increased production will bring them down. If interest rates are too high, the economy will slow. Interest rates will be adjusted downward. If no one buys houses, lowering demand, eventually prices will come down. Those things will happen.

It's just a question of when. In the meantime, you have some work to do. There are three important steps you can take to bring you closer to buying a house while you continue to rent. First, pay off your credit cards and make extra payments on your car loan if you have one. That reduces your debt-to-income ratio. The less debt you have, the more likely you are to get a loan and at a better rate. Second, make every payment on time.

Check your credit reports for errors and dispute any you find. Bring your credit score up as much as possible. That will also help you get a lower interest rate, which will make your monthly mortgage payments more affordable when you do buy. Finally, save, save, save. Put as much as you can in the bank and liquid savings for the down payment.

We always recommend 20% of the sale price. So basically, follow God's financial principles and see what he will do. Romans 12-12 reads, Rejoice in hope, be patient in tribulation, be constant in prayer. All right, your calls are next.

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This institution is not federally insured. Welcome back to Faith and Finance. I'm Rob West. We're taking your calls and questions today. 800-525-7000.

That's 800-525-7000. Hey, before we head back to the phones today, most major banks are predicting interest rates, rate cuts in 2024. I know so many of you are wondering, when are we going to start to see these rates come down, which will affect us negatively on the savings rates, obviously, for those loans that we have outstanding, especially where there's a variable rate or we need to get a new loan.

Obviously, that will take some of the pressure off. Bank of America is saying that it expects inflation to gradually cool globally, allowing central banks to trim rates in the second half of 2024, that to avoid a global recession. 2023, they're saying, defied almost everyone's expectations, recessions that never came, rate cuts that didn't materialize, bond markets that didn't bounce, except in short-lived kind of rising spurts. They're looking out to 2024 as a year when central banks can start successfully orchestrating what they call a soft landing, though they recognize that downside risks may outnumber the upside ones. Michael Gapon, the bank's head of U.S. economics, said he expects the Fed to make the first rate cut in June and then cut by 25 basis points per quarter. So we'll continue to, of course, watch this.

This is a big question that so many have that will affect the economy and the investments that you have in your portfolios moving into 2024, but a lot more to come on that in the days ahead. All right, let's head back to the phones. Looks like all the lines are filling up, so we'll move quickly. To Judy, who's driving in Chicago, how can I help? Hi.

I have about $4,000 in credit card bills due to lawyer bills, and I was wondering, since it's 20%, would it be better to maybe take some money out of my IRA to pay that? I am over 61, so... Yeah. I don't want to have this hanging over my head either. Yeah. No, I can understand that.

Tell me, Judy, are you still working? Yeah. Okay. And you do plan to continue working for the foreseeable future? Oh, yeah.

Okay. And how much do you have in that IRA? Only about maybe $5,000.

Okay, so it would pretty much wipe it out. Yeah. Yeah, because you'd have to pull out enough to cover the taxes as well. What other retirement assets do you have? Are you contributing to another account somewhere else? No, that's all I have. Okay. And so you're going to work as long as you can and then try to live on Social Security, obviously. Yep. Yeah.

Okay. You could certainly do that, and you're not going to pay the penalty, which is good. You will pay the taxes on it, which you may end up being in a higher bracket while you're working than waiting and letting this continue to grow down the road. You're certainly not earning 20-plus percent on this account, like what you're paying on that credit card balance. So I think you've got two options. One is you go ahead and pull it out and pull out enough to set aside to pay the taxes, so that didn't catch you by surprise. And then the second option would be if you're willing to close that account for that particular credit card, and maybe you have a second one that you use moving forward for budgeted items only, then you could put it into a credit counseling program with our friends at ChristianCreditCounselors.org, where they could help you get that interest rate way down.

So let's say it's 24 today, and they can help you get it to where it's between 6 and 12 percent probably, and then you just begin to or continue paying on it monthly, but at a much lower interest rate, and then you could leave the IRA there and let it continue to grow. I hope that helps you, and if we can help you further along the way, let us know, Judy. God bless you. Let's go to Cape Coral, Florida. Hi, Kate.

Go right ahead. Hi there. Hey, my husband and I, we've acquired some rental properties in Colorado and in Cape Coral, Florida, and at one point they used to be passive income, but now they are definitely active income, and we're very busy, so we've considered selling them, but we shy back every time we look at capital gains. So we're wondering, is there any other options? Well, I mean, no. Well, there are.

So let me just explain. The two options would be, number one, if you wanted to continue to invest in real estate, you could do a 1031 exchange, where you essentially kick the can down the road on capital gains by rolling it into another similar property. But it's sounding to me like you want to get out of the landlord business, and if that's the case, the only other way to get around capital gains would be to donate a portion or all of the property to, let's say, a donor advised fund, and then do some giving out of it. If you were planning to do some giving anyway, you might as well give it before you sell it to a donor advised fund, and then that portion that you give away, you wouldn't have any capital gains on it. Apart from that, it's an appreciated asset, and you will pay capital gains. Now, the capital gains rates are very attractive right now.

You know, they're probably headed higher in the future, depending on what happens with the next presidential election in Congress. So right now, if you're married filing jointly, you know, the cap long term capital gains rate, meaning you've held the property for more than a year. If your income, not your gain, but your income is between $89,000 a year and $550,000, you'll have a 15% capital gain just on the gain, the profit. If you make less than $89,251 married filing jointly, the capital gains rate is zero.

So, you know, rents are still fairly attractive right now, but in terms of you exiting the real estate market and not rolling this forward into another property, you know, the only way you're going to miss that zero or 15% tax rate, or if you make over $550,000, 20% capital gains tax rate is by giving it away. Okay. All right. Well, thank you. Thank you very much. Okay.

All right. You're welcome. We appreciate your call today. Thanks for being on the program. To Brandon, Florida. Hi, Ron.

Go ahead, sir. We have a small church and we have approximately 500,000 that we would like to park somewhere to get a little bit better yield. Right now it's in a savings account and it's not really growing at all. I mean, it's very little interest. So what kind of recommendations for moving that money? We're going to probably need some of it within about 14 months. Okay.

Yeah, very good. Yeah, I would look, uh, you know, I would stay in the, the guaranteed, you know, category. So I'd be looking probably at a money market account, uh, with two different institutions. So you don't go above the $250,000 for the FDIC insurance. Um, but you know, you should be able to get north of 4% right now, you know, with this being money that was given to the church by church members, uh, for the purpose of, uh, either church operations or a building project.

I just, and this is just my conviction. If I were on your finance committee, I would tell you, you know, we, there's no reason why we would ever want to invest that money. You know, I don't believe taking risk with that money is in line with the time horizon here or the objective for the donor. So for that reason, I would stay only in those guaranteed categories, which is either high yield business savings or a money market account with FDIC insurance, uh, looking to get, you know, more than 4%, which is, that's the good news is, you know, for the next year, probably, or more, you're still going to be able to get a fairly attractive rate. And you don't have to worry about it's time to build and we pull up our investment portfolio and our, our portfolio is down 15%.

And so, you know, all of a sudden we've lost, you know, $50,000 or something like that, or, or 75,000. So I think that's the direction that I would go, Ron, as you think about this. Thanks for your call.

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Hey, before we head back to the phone. So just before the break, we were talking to Ron, he's a pastor of a small church and they're working on a building project. They've got about a half a million dollars that they have taken in from givers in the church and wondering what to do with it. He's not earning a whole lot on it right now. And what I was sharing with Ron is I wouldn't put that money at the risk of the market.

I don't think that meets the purpose for which it was given. I also think the time horizon of the next one to two years before needing that money aligns with taking any risk, even if they had the right time horizon. So what I would do is look at either a money market account or high yield savings.

One other option to look at, and this would be a great option, especially for a church, is our friends at Christian Community Credit Union has what they call a welcome CD. So this is for a new account with new money coming in specifically for churches and ministries. And that CD at seven months is five percent.

APY for 14 months, it would be at five and a quarter percent. So I think that would be a great option. Again, this is specifically for ministries putting new money in. And this is Christian Community Credit Union. Ron, I would check that out. I think this might be a great option at JoinChristianCommunity.com. That's JoinChristianCommunity.com and just check out the welcome CD. All right, let's head back to the phones to Indianapolis we go. Hi, Denise.

Go right ahead. Hi, I retired in January and I have two 401Ks. Either one were performing real well. And now that I'm not putting any money in either of them, I was willing to know what percentage you think would be good. I want to put some money in something that's more guaranteed interest versus less speculation.

I don't plan on taking anything but the minimum distributions when I do start taking. But I just don't know what percentage. There's different opinions about that. Sure. What's the total between the two of them roughly? How much money are we talking? I'm thinking $85,000.

Okay. And how much are they down? Were they at $100,000 or more?

Yeah, they were about at $100,000 and they're down to $85,000. Yeah, okay. Yeah, you know, I would probably I mean, certainly you're the steward and so you need to make this decision and I can understand your desire to want to limit the downside. I guess the issue is, you know, we need to outpace inflation. And the question is, how do you take an appropriate amount of risk and yet still have the chance to have these perform well over time and give you an appropriate rate of return? It's a matter of it's always a trade off between risk and reward. How much risk are we willing to take for how much long term, you know, reward potential.

And the more we get into the guaranteed products and limit the downside, the more we give up the upside potential. There's always a trade off there. But I guess Denise, given that you really don't need this money other than just the required minimums when that time comes, I guess, you know, my preference would be that you roll these out of those 401ks into one IRA.

And then you find an advisor, if you have one with this Christian firm, great. If you don't, maybe another one that can manage the whole thing, but do it in a way that is appropriate for your risk tolerance, age and objectives. And the idea there would be, you know, let's say you were 70. It doesn't sound like you're 70 today, but let's say you were, you know, we'd probably look at maybe having 40 percent in stocks and 60 percent in bonds.

The bonds are going to be more stable as the interest rates come down starting next year, the bonds will do well, the prices will go up, plus you have the yield. And then the stock portion, again, not over six months or a year or two years, but over the next 10 or 20 or 30 years, which you're going to need if the Lord tarries and you're in good health, you know, you can have a nice growth component to that portfolio as well. And what that's going to do is ensure that you don't lock in these unrealized losses you have today, give you the potential to see it recover, but also give you the potential to grow it.

And as long as you're taking a long term perspective with this, you know, I think that's an appropriate way to think about this with an advisor that you feel good about that's giving, you know, active oversight and management to it. But like I say, if you're just not comfortable with that, then I'm not trying to talk you into anything. Then we can explore those guaranteed options.

But give me your thoughts. Well, I like the idea of the 40-60. And I'm still willing to risk a little bit. So that gives me more peace.

I was thinking 50-50. So you're a lot closer than they were trying to sell me on 70-30. And I was like, huh? Well, at the end of the day, you're the steward, Denise. This is your money. They're there to serve you and you want to seek wise counsel. But at the end of the day, you need to feel comfortable that you're being the steward of this money that God wants you to be. If you've got an advisor, again, great. If you don't, you could consider a certified kingdom advisor there in Indianapolis on our website, faithfi.com. Just click find to see Kay. Once you land on one, I'd have that advisor roll those 401ks into one new IRA, Individual Retirement Account in your name.

And then they can take over the management at that point. Thank you for your call today. All the best to you. Let's stay in Indy and talk to Martha. Go right ahead.

My name is Martha and I'd like to ask a question. I have a home and I owe about $72,000 on it and I have about $90,000 in my savings. Now, should I pay the house off? Okay, yeah.

So let's talk about that. So you owe $70,000 and you have how much in savings? About $90,000. All right. And is that in like a savings account or in a retirement account? No, it's just in a regular savings. Okay, very good.

Exactly. Yeah, that's great. And then do you have retirement assets in addition to that, Martha, or just Social Security?

I just have Social Security and I have a government check, a couple of government checks for my husband. Okay, very good. But in terms of investable assets, all you have is the $90,000. So you would be down to $20,000 total, correct?

Right, exactly. And what do you think your total bills are on a monthly basis, roughly? I guess they're close to maybe with the house payment. It's like close to $2,000, something, $2,500, something like that. Yeah, and obviously it would be a good bit less than that if you paid off the house. Right, exactly.

Yeah. Well, I like that because that would leave you $20,000 and that would be, you know, obviously I like for you to have at least six months expenses, but let's say your bills dropped to $1,500, you know, for the month, even if it was $2,000, you know, at $20,000, that'd give you 10 months worth of expenses, and you're going to have more surplus on a monthly basis between the two government checks from your husband and your Social Security. So you'd be able to continue to build that up, plus you'd have the peace of mind to know that you own your home free and clear at that point. So I like this option.

If you feel good about it, Martha, I don't think you'll look back or ever regret it, and I think the numbers make sense in terms of the additional surplus you'll have on a monthly basis, plus the fact that you'll have probably almost a year's worth of expenses in the bank as your emergency savings. So I'd say go for it. Hey, thanks for your call today. We appreciate it. Hey, we're almost out of time, but I wanted to let you know that you don't ever have to miss a program. Just download our Faithfi app for your mobile device and take us with you anywhere. Thanks for joining us today. I look forward to talking with you again next time on Faith and Finance. Faith and Finance is provided by Faithfi and listeners like you.