How to make buy vs. rent housing decision as mortgage rates surge

With mortgage rates rising, more people may be asking themselves the age old question: rent or buy? 

These decisions are particularly pertinent amid bubble-like housing prices, making monthly mortgage payments more difficult to manage, and also sky-high rents that have proven to be one of the economy’s stickier forms of inflation.

The latest Federal Reserve interest rate increase, while not directly tied to mortgage rates, is having some effect on lending and home prices. And the Fed isn’t done raising rates yet this year.

The average 30-year fixed-mortgage rate was 6.10% as of Sept. 13, according to Bankrate.com, and it has been rising steadily, up to 6.43% on Tuesday, according to the mortgage rate comparison service, after the Fed’s most recent decision last week to raise its benchmark interest rates by another three-quarters of a percentage point — the third-time in a row it has raised rates by that amount.

More homebuyers are pulling out of deals given the environment. Here’s how to weigh the biggest housing decision you may ever make in your life.

Take a big-picture approach

Cory J. Phillips, a financial advisor at Pittsburgh-based Fort Pitt Capital Group, said he’s heard from clients that they are concerned about buying now because of rising rates. But rates are only one consideration when it comes to buying a house. 

Although they are higher than the recent past, rates are still among average levels over the last 30 years, he said. “The last couple years we, as consumers, got used to such a low rate. Now it’s our expectation,” he said. 

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Trying to time the rate market isn’t wise, Phillips said. If the buying elements are right for you, it could still make sense to buy, even as rates are rising.

But before plunking down money on a down payment, consider what the next few years could look like. Are you interested in planting roots, or is there a strong chance you’ll relocate in three to six years? If the latter is a possibility, Phillips said he wouldn’t generally advise buying now because the closing costs and commissions are likely to negate the benefits. 

Rent premium versus ownership premium

Sure, renting is expensive. From 1985 to 2020, the national median rent price rose 149%, while overall median income grew just 35%, according to an analysis of publicly available data by Realestatewitch.com.

But homes are also pricey, even though they fell 0.77% from June to July. That’s the first monthly decline in nearly three years, according to Black Knight, a mortgage software, data and analytics firm, and prices have softened significantly in recent months relative to historical data….