El Paso, Texas, and Detroit may be the most affordable markets to move to in 2023, but that doesn’t make them the best investment, according to Redfin chief economist Daryl Fairweather.
Uncertainty surrounding the economy — coupled with high mortgage rates, which are still hovering above 6% — has pushed many would-be homebuyers out of the market. Redfin data shows that home sales in November were down 35% year-over-year.
Fairweather offered tips for potential homebuyers on where the best and worst places are to invest in if moving in the new year.
“If you want to avoid a situation where you buy a home, and then it goes down in value over the next couple of months, I would avoid the Sun Belt,” Fairweather said.
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Specifically, Fairweather mentioned Austin, Texas; Phoenix; and Las Vegas, due to the risk of price declines in the near future.
In a report earlier this month, Redfin cautioned that homeowners in certain parts of the country including Las Vegas and Phoenix “are at higher risk” for falling underwater on their mortgage.
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In the meantime, if interest rates stay elevated, Fairweather projects that prices in those areas will continue to decline. By the end of the year, mortgage rates are estimated to sit between 5% and 6%. A year ago, the benchmark 30-year rate was hovering around 3.22%.
However, Fairweather projected that the Sun Belt will rebound.
“Even though it may be a little bit overinflated now, there’s going to continue to be strong demand for those places in the long run,” she said.
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Meanwhile, a safe bet is markets in “the Midwest and the Northeast, because those areas tend to retain their value,” Fairweather said.
Examples would be Lake County, Illinois; Albany, New York; New Haven, Connecticut; Milwaukee; and Chicago, she added.
If consumers really want to play it safe, it’s best to look for homes below the median-priced home in that market.
“Those are going to be the kinds of investments that really retain their value because people are always going to be wanting an affordable option,” Fairweather said.
For renters, it’s a different story.
Year-over-year increases have fallen into the single digits, and in November the market saw the lowest annual growth in over a year, according to Jon Leckie, a researcher with Rent.com.
“From August to September, and again from September to October, rents actually decreased as fewer renters sought apartments from a growing pool of available units,” he said, adding that it “puts renters in their strongest negotiating position in nearly two years.”
If you can afford it, Leckie recommends staying put.
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“Landlords are far more likely to work with good tenants they know than to take a risk at a lower return on a new one,” Leckie said.
He also recommends that renters find out what historical year-over-year increases have been in their area when negotiating prices.
“Show you are willing to move some on price but try to get any increases in line with historical trends rather than the extreme ups and downs the industry saw over the past few years,” he added.
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Another tip is to offer to sign a longer lease that locks you in for two years instead of one. No matter what renters decide, though, they have to act fast.
Leckie predicted that rents will continue to drop through the winter, “but by the spring demand for apartments will return along with higher prices.”