Trulia released a study yesterday showing that right now in today’s market, buying a home is 44% cheaper than renting a home, despite rising home prices. As a renter who is in real estate sales, I found this article and the statistics very interesting, and helpful. For those of you that will eventually be first-time home buyers, this is great information to give you an idea of how much more money you are going to spend in 2013 by renting compared to owning a house. Charleston was one of the cities included in this study and showed that buying is 53% cheaper here than renting.
The biggest reason why owning is so much less expensive in certain areas is because of low mortgage rates, which has made homeownership almost as affordable as renting in all 100 large metros, according to Trulia. Since February 2012 the 30-year fixed rate dropped to 3.5%. Now, you might be asking yourself how this is all possible. First, you want to look at the average rent and for-sale price for an identical set of properties Then, the most important part, is to calculate the different initial and future monthly costs for owning and renting. For owning, this includes maintenance, taxes, and insurance. Then there are also your one time costs, which are usually just a security deposit and monthly utilities for renters and closing costs, down payments, and sales proceeds for owners.
This is all assuming that buyers will get a 30-year fixed-rate mortgage at a 3.5% mortgage rate with 20% down, will live in their home for at least 7 years, and reside in a 25% tax bracket. If you change these factors, for example, and plan on living in your home for less than 5-7 years and mortgage rates rise, then you would probably be looking at a different scenario. Right now mortgage prices are “low enough relative to rents that buying would beat renting even if mortgage rates rose two full points.” However, this will not last forever and mortgage rates will inevitably rise. And if you are renting because you know you will be moving around, then buying probably wouldn’t be more affordable. And sometimes there are going to be uncertainties with owning a home, such as unforeseen maintenance and upkeep costs, or an unexpected move.
The bottom line is that this trend will not be constant, as mortgage rates and home prices will eventually rise. Within the next year, this could all look dramatically different with this combination of prices outpacing rents and higher mortgage rates. This will more than likely make buying “less affordable relative to renting than it is now.” What does this all mean? If you’re renting and plan to be a first-time home buyer, this is the time to do it!