Johnson Tsai’s business is usually 50-50: evenly split between representing buyers in and doing rental deals in New York City. Soaring mortgage rates has changed that dynamic.
“Given the current market, my business is at least about 60% renters and the other 30% to 40% is buyers and sellers,” said Tsai, an agent at brokerage REAL New York. Tsai expects this trend to continue into 2023 and likely widen when New York City’s rental market picks back up in the early spring.
Prospective first-time buyers who don’t have cash for a big down payment may continue renting because they don’t want a huge mortgage and the risk of sinking underwater when a recession is looming.
Chen Zhoa, the team lead of Redfin Economics Research
As mortgage rates have risen to the highest level in decades, prospective home buyers are increasingly finding themselves on the sidelines. In fact, the number of renters who can even afford to buy a home at the national median list price of $425,000 compared to a year ago is down about 15%, according to the National Association of Realtors.
“The monthly mortgage payment is about $1,000 higher than a year ago,” said Nadia Evangelou, an economist with the Realtor trade group. “So, current buyers need to earn about $40,000 more in order to buy the median priced home compared to buyers who purchased their home a year ago.”
As a result, many prospective home buyers are making the choice to continue renting as they wait for mortgage rates to improve.
“It nearly always makes more sense to rent if it’s a short-term living arrangement or you need flexibility to move at a moment’s notice. But now renting makes financial sense for a bigger portion of the population,” Chen Zhoa, the team lead of Redfin Economics Research, said. “Prospective first-time buyers who don’t have cash for a big down payment may continue renting because they don’t want a huge mortgage and the risk of sinking underwater when a recession is looming. Also consider how you’re putting your money to work: Renting makes more sense if you can put what you would have used for a down payment into another investment that’s likely to grow in value.”
Though renting makes financial sense for most prospective homebuyers these days, it’s a tough break for real estate agents. Very few agents are getting rich off the rental market – depending on the market an agent operates in, the commission on a rental property often ranges from 25% to 50% of a full month’s rent. However, if the property has a listing agent, depending on the agreement negotiated, that 25-50% is often split 50/50 between the listing agent and the tenants agent.
There are so many different things you can do in your industry, depending on your interests and skills, besides just working with buyers and sellers.
eXp Realty agent Stacy Pulliam
While tenant agents are common in New York City’s highly competitive rental market, they are less common in other markets, as renters typically locate prospective rental properties and negotiate their rental agreements themselves. For many agents, when a potential buyer decides to rent they completely lose out on a commission.
With the Federal Reserve expected to hike interest rates at least two more times in the coming months and home prices only declining slightly thanks to tight inventory, industry experts believe demand for rental units will remain high for the foreseeable future. According to data from the National Multifamily Housing Council and the National Apartment Association, an estimated 4.3 million more multifamily units will be needed by 2035.
Although Augusta, Georgia-based eXp Realty agent Stacy Pulliam has seen a few of her prospective buyers continue renting in recent months, she remains optimistic about the future of her business. To weather the current housing market slow down, she is looking to further diversify her business.
“There are so many different things you can do in your industry, depending on your interests and skills, besides just working with buyers and sellers,” Pulliam said. “There is the government contract route, or you can go into coaching or property management. For me personally, based on my skill set, I am looking into more commercial properties, as well as government contracts.”
But at the end of the day, Pulliam does not consider losing clients to the rental market a loss for her long-term business.
“I am a people person, so I am all about meeting new people,” Pulliam said. “By staying in touch with clients who end up renting, you can hopefully keep that client as a future home purchaser. It is a long-term investment though. Instead of getting the payout now, you are investing in getting the payout later.”
