What Should You Do if House Prices Are Up and Rents Are Down?

Most of the time, if a housing market sees home prices going up, rent prices go up, too. The reverse is true: When home prices go down, rent prices usually go down, too.

Of course, the last year hasn’t been normal in many regards, and housing markets are no different. It appears as though 2021 is a good year to rent instead of buy when it comes to housing, but there’s now a twist. According to an article by Derek Thompson at The Atlantic, in some metro areas in the United States, rent prices have been going down while home prices have been going up.

To be clear, this isn’t happening in every city, but it’s happening in a large number of them. Thompson points out a list of major metro areas where this has happened over the last year, including Boston, Chicago, New York, San Francisco, San Jose, Seattle and Washington, DC.

Does this strange situation change the usual advice on whether to rent or buy? Let’s dig in.

In this article

    The impact on you when rents are lower

    Rent usually goes down in areas where there is a surplus of rental properties unoccupied. In order to fill them, landlords will reduce rents to attract new tenants.

    Why does this happen? It can happen for a number of reasons. One is that there’s an economic crisis and people simply can’t afford rent, forcing them to move to lower cost-of-living areas. Another reason, one that’s particularly true right now, is that many renters have been doing remote work, and if you’re working remotely, paying a very high rent just to sit at home doesn’t make a whole lot of financial sense.

    Regardless of what area you live in, if you’re a renter, this may be a great moment to shop around for a new place to live or even to negotiate for a lower rent with your landlord if your lease is up for renewal soon.

    The impact on you when housing is higher

    Similarly, housing prices go up when there are more people looking to buy homes than there are homes available on the market. Just like rent, it’s all about supply and demand, and in most housing markets, the demand for homes right now exceeds the supply. As long as demand exceeds supply, housing prices will go up.

    If you’re looking to buy right now, higher house prices mean a bigger mortgage. If you have to stay in your current area, you may want to wait. This might also be the right time to look to move to a new area with a lower cost of living.

    What about mortgage rates?

    Mortgage rates are forecast to rise slowly throughout 2021, according to CNBC. The expectation is that they won’t rise rapidly, but over the course of a year, mortgage rates may go up as much as 0.5%, from rates in the 3.5% range to rates in the 4% range.

    What does that mean in terms of dollars and cents? Let’s say you’re considering buying a home on a 30-year mortgage and need to borrow $300,000. At 3.5%, your monthly payment is $1,347, but at 4%, your monthly payment jumps to $1,432 — around $100 more.

    That’s enough of a jump that home sales will likely cool off a little throughout 2021, as the price difference is enough to nudge some people to stay put.

    Beyond 2021, there is some belief that The Federal Reserve will eventually raise interest rates, which will cause an immediate bump in mortgage rates, further slowing down the housing market. This isn’t expected anytime soon, but it’s definitely in the forecast.

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    The short-term game plan

    So, what should you do in the short term?

    If you’re in one of those housing markets where rents are going down but housing prices are going up, rent is a relatively good deal. You should try to shop around and lock down a low rental price for the next year or two if you’re committed to staying in the area.

    Another option is to look seriously at moving to a lower cost-of-living area, where both rents and home costs are going up but are much lower than some of the expensive areas listed earlier.

    In either case, you’ll likely save money on rent compared to buying a home in an expensive area, or you’ll save money by moving to a less expensive area, so take advantage of that. Start putting aside money for the future, particularly if you eventually plan to buy a home.

    The longer-term game plan

    If you’re looking to buy beyond 2021, you should watch carefully what The Federal Reserve does and what’s happening with inflation. Interest rates will likely go up when the Fed raises rates, which may happen in 2022 or 2023 if the economy heats up and inflation starts to increase.

    You’ll either want to lock down a mortgage at a low interest rate through pre-approval before such an increase occurs or wait for a while for the housing market to cool off (and likely drop in price in many areas) after a Fed rate increase.

    If you’re trying to beat a Federal Reserve rate increase, start saving as much as you can right now for a down payment so you can pull the trigger on a mortgage before then. If not, play the rental market and aim to keep your rent as low as possible, and if you can, move to an area with lower rental rates.

    Of course, another option is to consider never owning a home at all and continuing to play the rental game. There are real financial advantages to this approach, provided you’re careful with your spending.

    We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

    Trent Hamm

    Founder & Columnist

    Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.