Insights

This Often-Overlooked Homebuying Cost Could Make for an Even Larger Renters Market

If high home prices and rising mortgage rates aren’t enough to keep buyers from breaking into the current real estate market, a third factor could keep them renting indefinitely: high closing costs. 
Purchasing a home these days comes with its fair share of sticker shock, especially when a buyer’s final offer is made to vanquish a bidding war. But as part of the victory, the buyer will also have to deal with paying for everything else that gets wrapped up into closing costs, such as taxes, title insurance, lender fees, and of course, real estate agent commission. 
According to data gathered by CoreLogic’s Closing Corp, closing costs rose 13.4% in 2021 year over year. As with many other things, loan origination became more expensive, but now that mortgage rates are on the rise, lower demand for mortgages has also contributed to these raised costs.
Image source: Getty Images.

The double-digit increase means it will take an average of about $7,000 in additional funds to finalize the purchase of a single-family home. It’s more than double that in some places, including New York, Maryland, and Delaware. But brace yourself: Washington, D.C., is quadruple that, with closing costs reaching nearly $30,000, per CoreLogic’s data. 
Taxes make up the biggest chunk of closing costs, but even without them, closing costs have swelled 11% year over year. With the median value of single-family homes soaring to $382,000 as of March 2022 — up 15.2% from a year ago — it’s safe to say that homeownership is an even more expensive endeavor. And considering that thousands of dollars in closing costs can cover rent for months — the average apartment rent in D.C. is $2,261, per RentCafe data — it’s not surprising that would-be homebuyers are choosing to do just that.
An opportunity for rental investors
Of course, real estate investors, especially those in the multifamily housing market, stand to benefit from so many would-be homebuyers remaining renters. It might be tempting to sell off properties while home values are so high, but rents are at all-time highs, too — currently a two-bedroom apartment averages $2,050 a month nationwide, according to Rent.com data.
While multifamily housing offers more opportunity for steady income because of more tenants, there’s promise for single-family home investors, too. And while fixing and flipping can secure a quicker profit overall, those who are thinking more long-term in their strategy might instead consider renting out homes instead.
The real cost of higher closing fees for homebuyers
Renters who don’t have the additional cash for closing will remain renters. Some will do so indefinitely; in fact, Apartment List reports that 22% of millennials are planning to be “always renters” as of 2021, and that figure might be on the rise.
What do rising closing costs mean for current homebuyers looking to purchase a new home? If there’s considerable profit to be made on the sale of their current home, the higher closing costs might not be as bitter a pill to swallow. The same goes for homeowners looking to downsize to a lower-priced home, which will subsequently have lower closing costs. But if the higher cost of doing business is eating into a slimmer profit margin, current homeowners might find that they’re willing to stick around longer under their current roof after all.
This could mean that homeowners will spend money on improvements to make their current place larger or nicer. Of course, inflation is driving up the cost of home supplies, many of which are still plagued with delays due to continued supply chain issues — another cost to contend with.
For those determined to become homeowners, it could mean borrowing money from parents to cover the extra cash needed at closing or even moving into a home purchased with parents, continuing the trend of multigenerational housing. For others, it might mean putting off the idea of buying a turnkey home and instead purchasing a home that needs a little — or a lot — of improvements that can be done over the long term. But sadly, for many others, it will mean renewing that lease and putting the dream of homeownership on the back burner for a bit longer.
Barbara Bellesi Zito has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. –

If high home prices and rising mortgage rates aren’t enough to keep buyers from breaking into the current real estate market, a third factor could keep them renting indefinitely: high closing costs. 

Purchasing a home these days comes with its fair share of sticker shock, especially when a buyer’s final offer is made to vanquish a bidding war. But as part of the victory, the buyer will also have to deal with paying for everything else that gets wrapped up into closing costs, such as taxes, title insurance, lender fees, and of course, real estate agent commission. 

According to data gathered by CoreLogic‘s Closing Corp, closing costs rose 13.4% in 2021 year over year. As with many other things, loan origination became more expensive, but now that mortgage rates are on the rise, lower demand for mortgages has also contributed to these raised costs.

Image source: Getty Images.

The double-digit increase means it will take an average of about $7,000 in additional funds to finalize the purchase of a single-family home. It’s more than double that in some places, including New York, Maryland, and Delaware. But brace yourself: Washington, D.C., is quadruple that, with closing costs reaching nearly $30,000, per CoreLogic’s data. 

Taxes make up the biggest chunk of closing costs, but even without them, closing costs have swelled 11% year over year. With the median value of single-family homes soaring to $382,000 as of March 2022 — up 15.2% from a year ago — it’s safe to say that homeownership is an even more expensive endeavor. And considering that thousands of dollars in closing costs can cover rent for months — the average apartment rent in D.C. is $2,261, per RentCafe data — it’s not surprising that would-be homebuyers are choosing to do just that.

An opportunity for rental investors

Of course, real estate investors, especially those in the multifamily housing market, stand to benefit from so many would-be homebuyers remaining renters. It might be tempting to sell off properties while home values are so high, but rents are at all-time highs, too — currently a two-bedroom apartment averages $2,050 a month nationwide, according to Rent.com data.

While multifamily housing offers more opportunity for steady income because of more tenants, there’s promise for single-family home investors, too. And while fixing and flipping can secure a quicker profit overall, those who are thinking more long-term in their strategy might instead consider renting out homes instead.

The real cost of higher closing fees for homebuyers

Renters who don’t have the additional cash for closing will remain renters. Some will do so indefinitely; in fact, Apartment List reports that 22% of millennials are planning to be “always renters” as of 2021, and that figure might be on the rise.

What do rising closing costs mean for current homebuyers looking to purchase a new home? If there’s considerable profit to be made on the sale of their current home, the higher closing costs might not be as bitter a pill to swallow. The same goes for homeowners looking to downsize to a lower-priced home, which will subsequently have lower closing costs. But if the higher cost of doing business is eating into a slimmer profit margin, current homeowners might find that they’re willing to stick around longer under their current roof after all.

This could mean that homeowners will spend money on improvements to make their current place larger or nicer. Of course, inflation is driving up the cost of home supplies, many of which are still plagued with delays due to continued supply chain issues — another cost to contend with.

For those determined to become homeowners, it could mean borrowing money from parents to cover the extra cash needed at closing or even moving into a home purchased with parents, continuing the trend of multigenerational housing. For others, it might mean putting off the idea of buying a turnkey home and instead purchasing a home that needs a little — or a lot — of improvements that can be done over the long term. But sadly, for many others, it will mean renewing that lease and putting the dream of homeownership on the back burner for a bit longer.

Barbara Bellesi Zito has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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