You can save hundreds of dollars a
month by buying a home instead of renting – especially if you can get today’s
low mortgage rates, itemize your tax deductions and plan to live there for 7
years.
The most important housing decision
that most consumers face is whether to
rent or to buy. So to help them with this decision, we took a look
at the key market factors affecting the cost of homeownership. First off,
asking home
prices have started to rebound and have risen by 2.3% year over year
in August (3.8% excluding foreclosures); however, rents have risen more (4.7%).
This means that prices are lower relative to rents than they were a year ago.
But more importantly, mortgage rates have fallen: the best rates this summer
have been around 3.5%, while last summer rates were closer to 4.5%. Based on
asking prices and rents during the summer of 2012, buying is now 45% cheaper
than renting in the 100 largest U.S. metros, on average – that’s a savings of
$771 a month. If you plan to stay in a home for 7 years, which is the
average time that Americans traditionally live in a home before moving again,
it is more affordable to buy than to rent in ALL of the 100 largest metros in
the U.S.
Costs aside, the decision to rent or
buy a home is very personal. There’s a strong emotional component: some people
want the security of homeownership and others want the footloose freedom of
renting. But the financial factors are also very personal because the decision
to rent or buy depends on:
- Can you qualify for a mortgage at the best rate
available?
- Which tax bracket are you in, and do you itemize your
deductions?
- How long will you stay in your home?
To calculate whether renting or
buying costs less, we assume people can get a low mortgage rate of 3.5%,
itemize their federal tax deductions and are in the 25% tax bracket, and will
stay in their home for seven years. (Below, we’ll show how changing these
assumptions can affect the rent-versus-buy math.) We do the following
calculations:
- First, we looked at all the homes for sale and rentals listed on
Trulia in June, July and August 2012. On for-sale homes, we took the
asking price and estimated what it would rent for; for rentals, we took
the asking rent and estimated what it would sell for. That way, we can
calculate the average rent and asking price for an identical set of
properties in a metro area, for a direct apples-to-apples comparison.
By looking at homes currently for sale or rent, we’re able to illustrate
the actual housing options that consumers face right now.
- Second, we estimated the total costs of renting and
buying for the typical property in a metro over a seven-year period. We
factored in all the costs of homeownership (e.g., closing costs,
maintenance, insurance, taxes, etc.), along with the tax benefit of
deducting mortgage interest and property taxes, as well as the proceeds
from selling the home after seven years with modest home price
appreciation. On the rental side, we factored in renters’ insurance and
the security deposit. Finally, we calculate the net-present-value of
all those costs to capture the opportunity cost of tying your money up in
a down payment. This gives us the total cost of buying versus renting.
We then calculated the dollar difference and percentage difference between
renting and buying.
- Finally, we looked at alternative scenarios of the
costs of renting versus buying, by changing the mortgage rate, the
income tax bracket for tax deductions, and the time horizon.
Where Buying is a Slam Dunk
With a 20% down payment, a 30-year
fixed mortgage rate at 3.5% and at the 25% federal tax bracket, homeownership is cheaper than renting in
all of the 100 largest metros by a wide margin. There is no market where the
financial decision is even close, so long as you plan to stay in the home for
at least seven years, get 3.5% mortgage, and itemize your tax deductions.
However, how much cheaper it is to buy a home than to rent really depends a LOT
on where you live.
Buying is 24% cheaper than renting
in Honolulu, 28% cheaper in San Francisco, and 31% cheaper in New York. On the
other end of the spectrum, homeownership is extremely affordable in Detroit,
where buying a home is 70% cheaper to buy than to rent, and 63% cheaper in both
Oklahoma City and Gary IN.
Original article found at Trulia.com
and written by Jed Kolko.
