A softer home buying market caused by rising interest rates and shifting attitudes on homeownership has led prospective residents to debate whether renting or buying a home in the City of Falls Church is their best bet. In response, many are settling on an atypical kind of rental in single family homes as a stopgap.
Think of single family rentals as the best of both worlds. Tenants get the idyllic image of a home, but without the long-term commitment to a property. So if a new job opportunity becomes available out of state or an attachment to the neighborhood fades, there’s few strings attached to the home. Yes, there’s no equity to be reaped from the investment, but for more transient residents that was never on their radar to begin with.
According to Louise Molton, the principal broker at RE/MAX West End in the City, single family rentals in Falls Church have mostly appealed to families who know they’re going to be in the Washington, D.C. metro area for no more than three or four years. Mainly because it usually takes more than three years for the home value to appreciate to a point where it can offset the closing costs on a purchase and then a subsequent sale, despite the City’s strong market.
Will Rodgers, a real estate consultant at eXp Realty, supports Molton’s stance. Per Rodgers, most single family home rentals land a tenant in its first two months on the market. That claim is supported by looking at single family home rentals on Zillow.com. The City currently has eight single family dwellings available for rent, with an average of 36 days on the market and a median of 28 days — well within the two month range.
While not the primary determinant of a housing decision, the Tax Cuts and Jobs Act passed earlier this year did negate some of the unique benefits of buying a home, such as stripping the mortgage interest deduction for homes valued higher than $750,000 and putting a $10,000 cap on state and local tax (SALT) write offs. Add in that interest rates are reaching a seven year high for some 30-year fixed-rate mortgages and it’s reduced the buying power of prospective residents and lubricated a turn toward renting, according to the City’s director of real estate assessment Ryan Davis.
While Davis cautions that this analysis should be considered an educated guess since it won’t be until Thanksgiving that his department can crystallize how the market has shaken out in 2018, these are the trends he’s spotted so far.
It’s a reversal of how the housing market normally fares in the D.C. area.
“The D.C. market has always been tough for investors who want to rent out a property because rents would not always be what a mortgage payment would be — about 20 percent of a newly bought house,” Davis said. “It’s getting to where rent would be closer to a mortgage payment and would disincentivize buying a property, especially in the City where the tax rate is so high and you’re losing the [SALT] write off.”
Though Ana Tolentino, a senior loan officer for Atlantic Coast Mortgage, notes that current high interest rates need to be kept in context.
“I remember doing a loan for a client at seven percent in 2007 and she was thrilled to get her home and didn’t make a fuss about the rate. As loan officers we need to educate the consumer of the history of rates and on the benefits of owning a home,” Tolentino said, before adding, “We haven’t seen a decline in buyers looking to purchase but I have seen buyers wishing they would have bought earlier. Rates have been gradually increasing which has helped ease the increases. At the same time unemployment has gone down and we have seen an increase in wages which has helped level things off. All these factor have continued to help fuel the market.”
The stronger economy has helped counterbalance the rise in interest rates, but it seems the higher rates are winning hearts and minds (and wallets) as of now.
Per Davis, from Jan. 1 of this year up through Oct. 11, there have been 79 home sales that City has tracked through the Multiple Listing Service. In that same date range from 2017, 109 homes were sold. Median home prices have also dropped slightly, from $725,000 in 2017 to $720,000 in 2018. Most notably, homes that stayed on the market for more than 60 days increased by 800 percent, going from just two in 2017 to 16 in 2018.
However, it’s important to mention that single family rentals and homes for sale aren’t direct competitors.
Most rentals are older homes that, though renovated on the inside, don’t match the quality or appeal of newly constructed homes that continuously pop up throughout the City.
As Molton points out, the price points for rentals and homes for sale are in different tiers.
It’s also not ideal for landlords to rent out a newly constructed or luxury home since they’ll get less return on their investment, per Rodgers.
Still, enthusiasm around buying a home just doesn’t appear to be materializing at a clip that’s reflective of the economy’s health — even as residents show an enthusiasm for getting the single family home experience.
One reason may be a shortage of single family homes, specifically inventory of starter homes for aging millennials entering the market, according to Chris Salviati, a housing economist for Apartmentlist.com.
Salviati observes that the aforementioned transient nature of some area residents contributing to more rentals applies particularly to millennials, whose mobility in the labor market has affected their willingness to purchase a home.
But they’re also a generation who grew up during the Great Recession, caused by the housing bubble bursting, which has made them skeptical of the value of owning a home in general.
“The traditional decision is that home buying is better than renting, but in recent years people are starting to question that conventional wisdom,” Salviati said. “Now they say, ‘If another housing bubble were to collapse again, do I want my assets tied up in my house or do I want to continue renting and have a more diversified portfolio of stocks?’”
Salviati does go on to note that things such as the Tax Cuts and Jobs Act aren’t dictating home buying decisions on their own.
Instead, the new law may be steering people to look at purchasing a slightly smaller home rather than one they originally anticipated acquiring.
That jibes with another one of Davis’s observation that homes valued at over $1 million in the City are having trouble being sold for the time being.
Although it bears repeating that Davis’s observation remains more of an educated guess rather than a firm reality until his department can assess the market in full later this year
It’s still too early to forecast if this is a hiccup in home buying or a harbinger of things to come for Falls Church. But in the here and now, residents in and around the City are comfortable living year-to-year if the costs associated with renting versus buying are a wash.