The U.S. housing story of 2023 is one of two markets moving in different directions. For buyers, dwindling supply and a modest uptick in demand has meant home prices are on the rise again, even with 30-year mortgage rates hovering around 7%. The rental market is trending in the opposite direction, with rising vacancy rates as new apartment buildings hit the market and put downward pressure on rents — at least in metros where there's been a lot of construction in recent years.
This is creating a short-term opportunity for frustrated would-be homebuyers, especially in metro areas that have seen the most construction. In places such as Nashville, Charlotte and Austin, where rent growth is sluggish and lots more supply will be coming on line, these folks can get a great deal on a new apartment now and hope the market for homebuyers is better next year.
Recent trends suggest the divergence between the two markets will continue for several months, peaking in the third quarter. That's when the inventory of homes for sale is likely to be down on a year-over-year basis and the rental market potentially suffering with a national vacancy rate higher than at the peak of the pandemic and asking rents that may be down on a year-over-year basis.
Dwindling supply and continued labor market strength should support home prices, while a couple of factors should weigh on apartment rents. The first is that vacancy rates continue to rise at a rapid rate, according to online marketplace Apartment List. Vacancy rates typically stabilize before rents do, and the peak in vacancies might not occur until the first half of 2024. Second, the rental market is a seasonal business, with lease signings slowing during the winter months. Any landlord heading into winter with an excess of vacant units will face the prospect of those units staying vacant until spring, not generating any revenue. This may lead landlords to offer incentives this fall to mitigate that possibility.
That means at least some would-be homebuyers have a compelling option to consider. Buying a house is currently very unaffordable on any historical metric, and the lack of inventory only seems to get worse. Whereas in markets where a lot of apartments are being built it's getting increasingly common to see incentives such as one to two months of free rent for new tenants, and my view is incentives will be even greater six months from now. If there were ever a time to consider renting rather than buying, it's now.
One caveat for buyers is that while they might have an easier time waiting a year, there's not likely to be a glut of newly built supply like in the rental market. Also, employee incomes continue to rise, increasing purchasing power, and millennials continue to age into their prime homebuying years. According to Redfin, the average monthly payment that homebuyers are taking on has risen 15% over the past year to a record, due to some combination of home values holding up and higher interest rates.
So, for people deciding whether they should buy or continue renting for another year, the good news is that the apartment market is generally becoming more favorable and should continue that way for at least a few quarters. We could even see some pandemic-type deals toward the end of this year as landlords decide between eating the costs of rising vacancies and offering sweetheart deals to lure new tenants. The bad news is that while the math on buying is bad at the moment, it's not clear when or even if it will get better. We could easily be in the same situation a year from now as we are now — still not very much inventory, mortgage rates still around 7% and home prices up another 5%.
If forced to make a decision, renting for another year is probably the best financial decision in most cases. I just wouldn't expect buying to be any easier next year.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Conor Sen is a Bloomberg Opinion columnist. He is founder of Peachtree Creek Investments.