Some Wealthy Buyers Opting for Luxury Rentals Over Jumbo Loans

Rising home prices and increases in jumbo mortgage rates are steering many wealthy consumers to luxury rentals over homes for sale.

Steve Halpern, an agent at New York-based brokerage Urban Compass, told the Wall Street Journal that nearly half of his clients are choosing rentals, many after losing bidding wars. Many buyers are simply choosing to wait out the market. While these buyers can afford the loans, they are just not willing to take the risk.

Halpern discussed one couple he recently represented who sold a co-op in New York City’s Upper West Side and chose to rent a 3-bedroom condo in the same neighborhood for more than $13,000 a month.

This is a trend that is not unique to New York. In Minneapolis, the market for luxury rentals is also growing, particularly among young professionals and empty nesters.

Luxury home sales remain healthy, with the number of homes selling for more than $1 million rising, according to Zillow. The sale of luxury homes increased 29% last year over the previous year, with a median sales price of $1.44 million.

Mortgage rates are playing a major role in the decision for many buyers. With the average rate for a 30-year jumbo loan reaching 4.46% last month — compared to 3.9% in April — many wealthy buyers are choosing to invest money somewhere more profitable than housing.

The new mortgage rules also play a role. Many wealthy buyers are self-employed and face additional road blocks while obtaining a mortgage, as new regulation requires lenders be able to fully document and verify income.

Low inventory is also prompting many to wait out the market rather than get into bidding wars over a home they may not be crazy about.

Still, other buyers are turning to all cash sales to get an advantage against stiff competition from other buyers and to avoid mortgage fees and interest. Cash purchases reached a 10-month high two months ago, with more than 30% of all home sales made all in cash.

Despite the disadvantages to buying luxury real estate given the current market conditions, there are benefits. Rent is still very high. In New York City alone, almost 1,300 rental properties were priced at more than $15,000 per month, with the median list price for rentals over $15,000 increasing to $21,500, a 4.9% over the previous year.

Demand for rental properties has surged over the last few years and rents are projected to increase for the fifth year in a row. Apartment rents went up 6% between 2000 and 2012, while the average renter’s income has dropped 13% across the country.

Among major markets, rent has increased the most in Seattle (7.1% year over year) and San Francisco (5.6%).

For renting to become cheaper than buying in most areas of the country, Trulia calculates mortgage rates would need to hit 10.6%. There are still many markets were renting is usually cheaper.