Home equity, mortgage rates, and rent are all on the rise : The Indicator from Planet Money With rising interest rates, this economy has got us scratching our heads. To rent, or not to rent? To borrow money, or not to borrow? To qualify for a mortgage...or maybe not. Maybe our three indicators on the housing market will give clues.
Hey, we're off for Juneteenth but The Indicator will be back on Tuesday!

The housing shakeup

  • Download
  • <iframe src="https://www.npr.org/player/embed/1105986237/1106017223" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript

SYLVIE DOUGLIS, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

DARIAN WOODS, HOST:

This is THE INDICATOR FROM PLANET MONEY. I'm Darian Woods.

ADRIAN MA, HOST:

And I'm Adrian Ma.

WAILIN WONG, HOST:

I'm Wailin Wong. And it is time for indicators of the week.

WOODS: And the big economic news, as we've talked about a bit on THE INDICATOR, is that the Fed made this huge three-quarters of a percentage point lift in interest rates on Wednesday.

MA: Yeah. These rate hikes are meant to cool off the economy and lower inflation. And what we're going to focus on today is one of the biggest parts of inflation - the thing we spend a ton of money on in our everyday lives - housing.

WONG: So on today's show - how rising interest rates are shaking up the housing market, how this might affect homeowners, first-time buyers and renters.

(SOUNDBITE OF MUSIC)

WONG: First up, let's look at homeowners. So my indicator is $27.8 trillion. Try to get your heads around that number.

WOODS: It's a lot of money.

WONG: But it's a lot of money. I mean, U.S. GDP in 2021 was $23 trillion, so this is an even bigger number. Now, this is the amount of home equity owned by households in the U.S. According to Fed numbers, it is a record amount of home equity. And home equity is the difference between what a home is worth and what the owner still owes on their mortgage. So you can kind of see why, with home values going up so much in the last few years, that number has just gotten bigger and bigger. This has really just come from home prices going up and up and up. And so, in theory, it should represent this great tool for homeowners to, like, do something with, right? Like, you have all this equity. And, you know, a lot of people will borrow against their home to do projects like renovations or - I don't know - to, like, go on vacation or, like, make a big purchase or something.

MA: Or to, like, pay for their kid's schooling or something.

WONG: Yes, exactly. Any kind of big expenses that come up, it often makes sense to take out, like, a home equity loan and borrow against your home to make that happen.

WOODS: Got it. So are we going to see this wave of people borrowing against their home now that they have so much equity?

WONG: Well, this is kind of the conundrum that's now facing homeowners because even though their piggy bank is fuller than ever, rates are also going up, right?

WOODS: Ah, yes.

WONG: Like, mortgage rates are going up, and these rates track with the Fed rates. And so even though you have this, like, massive pile of money that theoretically you could use to borrow money, like, you probably don't want to borrow money right now 'cause the rates are going up so much.

WOODS: OK. So you're being given with one hand and kind of taken away with the other.

WONG: Yeah. And, you know, honestly, this is what the Fed wants, right? A big reason to raise rates is because you discourage borrowing, and then you cool down the economy.

WOODS: Thanks, Wailin. So my indicator is really salient for people looking to get a slice of some of that sweet home equity. The reality, though, is that it's just getting harder and harder to get a mortgage in the first place now that interest rates are shooting up because of the Fed. Mortgage interest rates are around 6% now versus 3% at the start of the year, and that means fewer people qualify for a mortgage. And this next indicator comes from Eric Finnigan. He's the director at John Burns Real Estate Consulting, and he's a data guy.

ERIC FINNIGAN: I love solving or answering questions that no one knows how to answer.

WOODS: And over the last year or so, he's been updating the numbers of who can get mortgages. And it's a fairly mechanical calculation. It takes incomes across American households, average debt, and adds in the current interest rate. And these numbers haven't been that interesting, to be frank, until earlier this month. So let's look at, like, a $400,000 mortgage - like, not too far away from the price of a typical house. And at the start of the year, mortgage rates were pretty low. So around 50 million American households could qualify for this mortgage. But then when mortgage rates shot up from January to June, Eric ran the numbers again.

FINNIGAN: It was a stark number - 12 million fewer households would qualify for that $400,000 mortgage.

WOODS: So it was this 24% reduction in just five months.

WONG: Oh, yikes. I feel bad for anyone who maybe started a house search at the beginning of the year and, like, didn't find anything yet. And now maybe, like, they can't even do it anymore.

WOODS: Totally. I mean, these people will be feeling quite frustrated. But look - the story actually doesn't end here, I'm sorry to say.

MA: Why do I feel like the story doesn't get better?

WOODS: You're right, Adrian. So in the last week or so, mortgage rates have shot up again. So they were around 5% when he first ran the numbers, and now they're 6%. So Eric ran the numbers again.

FINNIGAN: As alarming as that 12 million number is now, it's now outdated. Oh - and now the number is 18 million.

WONG: Oh, geez. There's, like, smoke coming out of his calculator.

WOODS: Exactly.

MA: (Laughter).

WOODS: Yeah. He hasn't seen numbers like this before, like, historically - a 36% reduction in the number of households who could qualify for that $400,000 mortgage since the start of the year. It's, like, this massive reduction very, very fast. And it's a lot of people who are being forced to put any homebuying dreams on hold. And one of the people who have paused the search is Eric. It's our guy. He himself was looking for a house. He's currently a renter, and he was daydreaming about having his own patch of land.

FINNIGAN: I'm very much looking forward to growing some vegetables in my backyard. I can't do that at the moment.

WOODS: What would you grow?

FINNIGAN: You know, I don't know. I would - like, I want to - what do people grow in their backyards? I just haven't had that chance to, like, sink in and grow roots.

WOODS: Grow literal roots.

FINNIGAN: Literal roots.

WOODS: So Eric is going to have to put his beet and carrot and potato dreams on hold, and he's going to be stuck renting for a little while, which brings us to your indicator, Adrian - rental prices.

MA: That is right. My indicator is 15.3%. That is the amount rents have increased in the past 12 months, according to researchers for a popular apartment listing website called Apartment List.

WONG: Oh, that's literally what it's called.

MA: That is literally what it's called. And that statistic that they reported is a national one. But in some markets, they're saying that rents have increased way, way, way more than that. Like, over the same period the past year, rents have gone up 20% in San Diego, 20% in Louisville, 28% in Miami. I talked to one of the economists at Apartment List named Chris Salviati, and he says the past year has really been unlike anything he's seen before.

CHRIS SALVIATI: When we look at the years preceding the pandemic - say, 2017 through 2019 - rent growth nationally was pretty modest - say, 2- to 3% per year. And so, you know, now over the past year, we've seen rents go up basically at five times that rate.

WONG: As usual, supply and demand is, like, the culprit here - right? - a shortage of available apartments.

MA: Yeah. I mean, the shortage is this, like, story that has been playing out for years. There just hasn't been enough new buildings and new housing units being built to meet demand. And plus, demand spiked during the past year and a half as people kind of moved out of their parents' house during the pandemic and got back into their rentals. And so those two things are happening. And then now on top of that, we have rising interest rates, and that is creating even more of a backup in the rental market where people who might have decided to leave their apartments before and buy a house are actually sticking around because they can't afford to buy a house.

WOODS: Right. And so that's making even more competition among people for that already short supply of rentals.

MA: Yeah. Actually, I read a post from the National Realtors Association that said some cities, realtors are reporting multiple offer situations on rental apartments.

WONG: No, no.

MA: And so, yeah, things are getting kind of ugly in the rental market. So one thing we should probably mention is that some people are worried that with rising interest rates, that may lead the economy into a recession. And if that happens, Chris says that could put some downward pressure on rental prices. But he says the thing to remember is that supply and demand for apartments is really out of whack. So whatever happens, that is not going to change overnight. And in fact, as long as interest rates are still high, another thing that does is make building new homes and new apartments more expensive, and that means that would also put upward pressure on rental prices. So it's a pretty tough time out there, even for economists who specialize in apartments.

SALVIATI: I've armed friends with that data, and I actually have, you know, friends that have used our data to try to get a little bit more bargaining leverage with their landlord. It is definitely, you know, a situation where I've been happy to help out.

MA: I think we could all use more friends like Chris.

WOODS: This episode was produced by Corey Bridges and engineered by Robert Rodriguez. It was fact-checked by Catherine Yang (ph). Viet Le is our senior producer, and Kate Concannon edits the show. And THE INDICATOR is a production of NPR.

Copyright © 2022 NPR. All rights reserved. Visit our website terms of use and permissions pages at www.npr.org for further information.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.