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Mario Pavli's Blog

By Mario Pavli | Agent in Boston, MA

Buying A Home 44% Cheaper Than Renting Despite Rising Home Prices

Even though asking home prices rose 7.0% in the last year, outpacing rent increases of 3.2%, the gap between buying and renting has narrowed only slightly. One year ago, buying was 46% cheaper than renting. Today’s it’s 44% cheaper to buy versus rent. In fact, homeownership is cheaper than renting in all of America’s 100 largest metros. That’s because falling mortgage rates have kept buying almost as affordable, relative to renting, as it was last year. According to Freddie Mac, between February 2012 and February 2013 the 30-year fixed rate dropped from 3.9% to 3.5%, though rates have been rising in March.

To determine whether renting or buying a home costs less, we do the following:

  1. Calculate the average rent and for-sale prices for an identical set of properties. For this report we looked at all the homes listed for sale and for rent on Trulia from December 2012 to February 2013. We estimate prices and rents for the similar homes in similar neighborhoods in order get a direct apples-to-apples comparison. We are NOT just comparing the average rent and average price of homes on the market, which would be misleading because rental and for-sale properties are very different: most importantly, for-sale homes are 47% bigger, on average, than rentals.
  2. Calculate initial total monthly costs of owning and renting, including maintenance, insurance, and taxes.
  3. Calculate future total monthly costs of owning and renting, taking into account price and rent appreciation as well as inflation.
  4. Factor in one-time costs and proceeds, like closing costs, downpayments, sales proceeds, and security deposits.
  5. Calculate net present value to account for opportunity cost of money.

To compare the costs of owning and renting, we assume people will get a 3.5% mortgage rate, reside in the 25% tax bracket and itemize their federal tax deductions, and will stay in their home for seven years. We also assume buyers get a 30-year fixed-rate mortgage and put 20% down. Under all of these assumptions, buying is 44% cheaper than renting nationwide, taking into account all of the costs and proceeds from buying or renting over the entire seven-year period. We also look at alternative scenarios by changing the mortgage rate, the income tax bracket for tax deductions, and the number of years one stays in the home.  Our interactive map shows how the math changes under alternative assumptions. And if you’re interested, check out our detailed methodology which explains our entire approach, step by step.

Savings from Buying Versus Renting Smallest in California and New York, Biggest in the Midwest
Buying a home is cheaper than renting in all of the 100 largest metro areas, but buying ranges from 19% cheaper than renting in San Francisco to 70% cheaper than renting in Detroit. The financial benefit of buying instead of renting is narrowest in San Francisco, Honolulu, San Jose, and New York.

Over the past year, the gap between renting and buying has narrowed most in the Bay Area. One year ago, buying was 35% cheaper than renting in San Francisco and 38% cheaper than renting in San Jose; now, the difference is 19% and 24%, respectively. These metros have seen strong price increases year-over-year. In contrast, the gap didn’t narrow at all in New York, where buying remains 26% cheaper than renting, both now and a year ago. On Long Island, the difference actually widened from 34% one year ago to 36% today. New York, Long Island, and other Northeastern metros have seen more modest price rebounds over the past year, despite rising rents:

Where Buying a Home is a Tougher Call

#U.S. Metro

Cost of Buying vs. Renting (%), 2013

Cost of Buying vs. Renting (%), 2012

1San Francisco, CA

-19%

-35%

2Honolulu, HI

-23%

-26%

3San Jose, CA

-24%

-38%

4New York, NY-NJ

-26%

-26%

5Albany, NY

-30%

-34%

6Orange County, CA

-32%

-41%

7San Diego, CA

-33%

-42%

8Los Angeles, CA

-35%

-37%

9Long Island, NY

-36%

-34%

10Ventura County, CA

-36%

-43%

Note: Negative numbers indicate that buying costs less than renting. For example, buying a home in San Francisco is 19% cheaper than renting in 2013. Trulia’s rent vs. buy calculation assumes a 3.5% 30-year fixed-rate mortgage, 20% down, itemizing tax deductions at the 25% bracket, and 7 years in the home.

At the other extreme, homeownership is most affordable in Detroit, where buying is 70% cheaper than renting. This means it costs less than one-third as much to buy a unit than to rent a similar unit in a similar neighborhood. In fact, buying is less than half the cost of renting (more than a 50% difference) in 46 of the 100 largest metros.

Where Buying a Home is a No-Brainer

#U.S. Metro

Cost of Buying vs. Renting (%), 2013

Cost of Buying vs. Renting (%), 2012

1Detroit, MI

-70%

-69%

2Dayton, OH

-63%

-70%

3Gary, IN

-63%

-60%

4Cleveland, OH

-63%

-57%

5Warren-Troy-
Farmington Hills, MI

-63%

-64%

6Toledo, OH

-62%

-59%

7Memphis, TN-MS-AR

-62%

-61%

8Kansas City, MO-KS

-60%

-55%

9Birmingham, AL

-59%

-60%

10Indianapolis, IN

-58%

-56%

Note: Negative numbers indicate that buying costs less than renting. For example, buying a home in Detroit is 70% cheaper than renting in 2013. Trulia’s rent vs. buy calculation assumes a 3.5% 30-year fixed-rate mortgage, 20% down, itemizing tax deductions at the 25% bracket, and 7 years in the home.

In the largest metros, the rent-versus-buy decision depends largely on location. Within the New York metro area, buying is just 6% cheaper than renting in Manhattan, but 53% cheaper in suburban Westchester County. This, however, is an extreme example. The differences within most metros aren’t quite so stark. In the Los Angeles metro area, buying is 22% cheaper than renting in the Pasadena / San Gabriel Valley area (telephone area code 626), while buying is 36% cheaper than renting in the San Fernando Valley (area code 818). The difference between the 626 and the 818 is a lot smaller than the difference between Manhattan and Westchester.

Here’s How Renting Could Be the Better Deal
Three factors have a real impact on the rent-versus-buy math: mortgage rates, tax deductions, and how long you stay in your home. Change any of these factors, and buying a home won’t look quite as inexpensive relative to renting. Using our baseline assumptions of getting a 3.5% mortgage rate, deducting at the 25% bracket, and staying in your home for 7 years, buying is 44% cheaper than renting nationally. Here’s the “but”:

  • Lower mortgage rates lower the cost of owning. While buying is 44% cheaper than renting with a 3.5% mortgage, buying would be 39% cheaper than renting at 4.5% and only 33% cheaper at 5.5%. Higher rates mean a higher cost of owning, but prices today are low enough relative to rents that buying would beat renting even if mortgage rates rose two full points.
  • Itemizing deductions lowers the cost of owning. Mortgage interest and property tax p
 
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