With threats of an increase in the Federal Funds rate and the expected corresponding increases in mortgage lending rates the question of renting vs buying is timely.
To address this question let’s first look at the expected impact on mortgage rates if the fed does follow through on the anticipated rate increase.
Let me begin by noting that historically, as fed rates increase, the impact on mortgage rates is not linear. In other words, a .25% increase in the fed rate does not necessarily lead to a similar gain in the mortgage rate. This is because though it is a common belief that the Federal Reserve "makes" consumer mortgage rates, they do not. Mortgage rates are determined by the pricing of mortgage backed securities traded on Wall Street.
Want proof? Over the last two decades, the Fed Funds Rate and the average 30-year fixed rate mortgage rate have differed by as much as 5.25% at times and by as little as 0.50% at other times. If the Fed Funds Rate were truly linked to U.S. mortgage rates, the difference between the two rates would be linear or logarithmic -- not jagged.
That said, as the nation's central banker, the Federal Reserve does exert an influence on today's mortgage rates. Their opinions on the state of the US economy as presented to the press can drive mortgage rates up if the outlook on the U.S. economy is positive, down if the outlook is negative. Outside of more extreme occurrences such as a huge jump in inflation, these rate shifts tend to come in smaller increments.
What does this mean? Even if the fed does increase the Federal funds rate as anticipated in December the upward movement in the mortgage loan rate will be pretty small and rates will remain at relatively low levels.
The news for rental prices is not quite so rosy.
A new market report by Marcus and Millichap reveals that for those wanting to live in Los Angeles, it is going to be pricey with the average cost of rent on the west side at about $2,700, up nearly 7 percent from last year.
Santa Monica and Marina Del Rey average rents are at over $3,000, while rent in the San Fernando Valley jumped more than 15 percent to about $1,400 a month.
Real estate experts expect rent to rise about 4.8 percent in Los Angeles County for the remainder of 2015 to an average of over $1,800 a month - more than doubling the rate of inflation.
With aggressive increases in rent and lending rates that will remain near historic lows, it makes sense to consider buying versus renting today. Locking yourself into a set monthly payment for the next 30 years vs. risking these rent escalations? Which sounds more comfortable to you?