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articles about “Rent vs. Buy

Buying a Home 38% Cheaper Than Renting – But How Risky Is It? Visualization Preview

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Buying a Home 38% Cheaper Than Renting – But How Risky Is It?

Though the gap is narrowing, buying costs less than renting in all 100 large U.S. metros. But uncertainty about future home price appreciation means buying isn’t always a safe bet.

Jed Kolko, Chief Economist
February 26, 2014

Homeownership remains cheaper than renting nationally and in all of the 100 largest metro areas. Rising mortgage rates and home prices have narrowed the gap over the past year, though rates have recently dropped and price gains are slowing. Now, at a 30-year fixed rate of 4.5%, buying is 38% cheaper than renting nationally, versus being 44% cheaper one year ago.

The rent versus buy math is different in each local market. Buying ranges from being just 5% cheaper than renting in Honolulu to being 66% cheaper than renting in Detroit. But even for a specific market, the cost of buying versus renting depends on how much home prices rise (or fall) after you buy. Our model assumes conservative home price appreciation, but – as we all know after the last decade – home prices can unexpectedly rocket or plummet. This edition of Trulia’s Rent vs. Buy Report focuses on how different home price assumptions can affect the math for someone deciding to buy or rent today.

Our interactive Rent vs. Buy Map shows how the math changes under alternative assumptions for the mortgage rate, the income tax bracket for tax deductions, and the number of years that one stays in the home.  To personalize the decision fully, Trulia’s Rent vs. Buy Calculator lets you compare the cost of renting and buying based on whatever assumptions and scenarios you like.

This report, our map, and our calculator are all powered by the same math, which includes these five steps:

  1. Calculate the average rent and for-sale price for an identical set of properties. For this report we looked at all the homes listed on Trulia for sale and for rent from December 2013 through January 2014. We estimate prices and rents for similar homes in similar neighborhoods in order to get a direct apples-to-apples comparison. We are NOT just comparing the average rent and  price of homes on the market, which would be misleading since rental and for-sale properties are very different: most importantly, for-sale homes are roughly 50% bigger, on average, than rentals.
  2. Calculate the initial total monthly costs of owning and renting, including the mortgage payment and rent, as well as maintenance, insurance, and taxes.
  3. Calculate the 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, down payment, sales proceeds, and security deposits.
  5. Calculate the net present value to account for opportunity cost of money.

To compare the costs of owning and renting, we assume buyers get a 4.5% mortgage rate on a 30-year fixed-rate loan with 20% down; itemize their federal tax deductions and are in the 25% tax bracket; and will stay in their home for seven years. Under these assumptions, buying is 38% cheaper than renting nationwide, taking into account all of the costs and proceeds from buying or renting over the entire seven-year period. The full methodology is available here.

Buying Beats Renting Until Mortgage Rates Hit 10.6%
Buying a home remains cheaper than renting in all of the 100 largest metro areas. Even though prices increased sharply in many markets over the past year, low mortgage rates have kept homeownership from becoming more expensive than renting. Also, in some markets, like San Francisco and Seattle, rents have risen sharply; rising rents hurt affordability relative to incomes, but rising rents make buying look cheaper in comparison.

The rent-versus-buy math differs across metros mostly because each local market has its own normal level of prices and rents, but also because property taxes and home-price appreciation differ in individual markets as well. Taking all these factors into account, buying ranges from just 5% cheaper than renting in Honolulu to 66% cheaper than renting in Detroit. Generally, buying is a tougher call relative to renting in California and New York, while the gap is largest in the Midwest and South.

Will renting become cheaper than buying soon? Some markets might tip in favor of renting this year as prices continue to rise faster than rents and if – as most economists expect – mortgage rates rise, due both to the strengthening economy and Fed tapering. For each metro, we identified the mortgage rate “tipping point” at which renting becomes cheaper than buying, given current prices and rents. If rates rise, Honolulu would become the first metro to tip, at a mortgage rate of 5.0%. San Jose and San Francisco would also tip before rates reach 6%. But those are the extreme markets. Nationally, rates would have to rise to 10.6% for renting to be cheaper than buying – and rates haven’t been that high since 1989.

Where Buying a Home is a Tougher Call

# U.S. Metro

Cost of Buying vs. Renting (%),

Winter 2014

Cost of Buying vs. Renting (%),

Winter 2013

Mortgage Rate Tipping Point When Renting Becomes Cheaper Than Buying, Winter 2014

1 Honolulu, HI

-5%

-23%

5.0%

2 San Jose, CA

-9%

-24%

5.4%

3 San Francisco, CA

-13%

-19%

5.8%

4 Orange County, CA

-21%

-32%

6.8%

5 New York, NY-NJ

-22%

-26%

7.2%

6 Oakland, CA

-24%

-40%

7.2%

7 Los Angeles, CA

-24%

-35%

7.3%

8 Ventura County, CA

-27%

-36%

7.6%

9 Albany, NY

-27%

-30%

9.0%

10 Austin, TX

-30%

-38%

9.2%

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Rising Mortgage Rates Narrowing Buy vs. Rent Gap Visualization Preview

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Rising Mortgage Rates Narrowing Buy vs. Rent Gap

Despite higher mortgage rates, buying is still 35% cheaper than renting in all of the 100 largest metros, but San Jose, San Francisco, and Honolulu are on the verge of tipping.

Jed Kolko, Chief Economist
September 19, 2013

Homeownership remains cheaper than renting nationally and in all of the 100 largest metro areas. But rising mortgage rates have narrowed the gap between the cost of buying and the cost of renting. The 30-year fixed rate is now 4.80%, compared with 3.75% one year ago (according to the Mortgage Bankers Association, or MBA). This jump in rates has raised the cost of buying relative to renting. As a result, buying is 35% cheaper than renting today, versus being 45% cheaper than renting one year ago.

How can buying be so much cheaper than renting when home prices and mortgage rates are both climbing? The key reason: both rates and prices are rising from very low levels and are still below their long-term historical norms. But the rent versus buy math depends on your local market, as rising rates and prices have pushed a handful of metros very close to the tipping point when renting becomes cheaper.

Before going further into the data, here’s how we do the math. To calculate whether renting or buying a home costs less, we take the following steps:

  1. Calculate the average rent and for-sale price for an identical set of properties. For this report we looked at all the homes listed on Trulia for sale and for rent from June to August 2013. We estimate prices and rents for 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 roughly 50% bigger, on average, than rentals.
  2. Calculate the initial total monthly costs of owning and renting, including maintenance, insurance, and taxes.
  3. Calculate the 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, downpayment, sales proceeds, and security deposits.
  5. Calculate the net present value to account for opportunity cost of money.

To compare the costs of owning and renting, we assume people get a 4.8% mortgage rate on a 30-year fixed-rate loan with 20% down; itemize their federal tax deductions and are in the 25% tax bracket; and will stay in their home for seven years. Under these assumptions, buying is 35% 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 that one stays in the home.  The full methodology is available here.

Our interactive Rent vs. Buy 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.

RentvsBuyMap

Best of all: today we launched our new Rent vs. Buy Calculator, which lets you compare the cost of renting and buying based on whatever assumptions, prices, rents, and scenarios you like, using the same math that powers our interactive map and this report. Check it out and find out what’s the cheaper option for you.

San Francisco Bay Area Close to Tipping in Favor of Renting
Buying a home is cheaper than renting in all of the 100 largest metro areas, but buying ranges from being 65% cheaper in Detroit to just 4% cheaper in San Jose. In fact, owning is now cheaper by just 10% or less in San Jose, San Francisco, and Honolulu – that’s a big change from one year ago, when buying was 24% cheaper than renting in Honolulu, 28% in San Francisco, and 31% in San Jose. Even in markets with minimal year-over-year price increases, buying today isn’t as great of a deal versus renting compared with last year. For example, home prices rose just 1.7% year-over-year in Philadelphia, but buying is now 40% cheaper than renting compared to being 46% cheaper one year ago.

The biggest factor narrowing the gap between the cost of buying and the cost of renting is rising mortgage rates – which affect the entire country. In fact, the benefit of buying relative to renting shrank in nearly all of the 100 largest metros over the past year: only in Springfield, MA did the gap widen, from buying being 47% cheaper than renting last year to being 49% cheaper than renting today. Nationally, rising mortgage rates account for about 8 points of the 10-point shift from buying being 45% cheaper than renting one year ago to being 35% cheaper now. The other 2 points are due to prices rising faster than rents. (How did we figure that out? If you used today’s prices and rents in the rent vs. buy calculation but used a 3.5% mortgage instead of a 4.8% mortgage, buying would be 43% cheaper than renting – 2 points less than last year.)

Because fluctuating mortgage rates can affect the rent versus buy math, we identified the mortgage rate “tipping point” at which renting becomes cheaper than buying, given current prices and rents. If rates keep rising, San Jose will tip first in favor of renting, at 5.2%. Already today, at 4.8%, buying is just 4% cheaper than renting in San Jose. The tipping point is below 6% in San Francisco and Honolulu as well, and below 8% in New York, Los Angeles, and seven other major metros. Nationally, the mortgage rate tipping point is 10.5%, and it’s 20% or higher in Detroit, Gary, and Cleveland.

Where Buying a Home is a Tougher Call

# U.S. Metro

Cost of Buying vs. Renting (%),
Summer 2013

Cost of Buying vs. Renting (%),
Summer 2012

Mortgage Rate Tipping Point When Renting Becomes Cheaper Than Buying, Summer 2013

1 San Jose, CA

-4%

-31%

5.2%

2 San Francisco, CA

-9%

-28%

5.7%

3 Honolulu, HI

-10%

-24%

5.8%

4 Orange County, CA

-20%

-34%

7.0%

5 New York, NY-NJ

-21%

-31%

7.5%

6 San Diego, CA

-21%

-34%

7.3%

7 Los Angeles, CA

-21%

-32%

7.3%

8 Ventura County, CA

-22%

-33%

7.5%

9 Oakland, CA

-23%

-43%

7.5%

10 Sacramento, CA

-26%

-39%

8.2%

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Buying Cheaper Than Renting Til Mortgage Rates Hit 10.5%

Nationally, at today’s prices and rents, buying would be cheaper than renting until the 30-year fixed rate reaches 10.5%. San Jose has the lowest mortgage rate “tipping point” at 5.2%, followed by San Francisco and Honolulu.

The recent rise in mortgage rates has made buying a house a little more expensive: the increase in the 30-year fixed rate over the past month from 3.4% to 3.9% (Freddie Mac) raised the monthly payment on a $200,000 mortgage by $56, or 6%. However, because mortgage rates are still near long-term lows, and because prices fell so much after the housing bubble burst and remain low relative to rents even after recent price increases, buying is still much cheaper than renting. That means that the recent jump in rates doesn’t change the rent-versus-buy math much.

Rates are likely to keep rising, but how far must rates rise before buying a home starts to look expensive relative to renting? To answer this, we updated our Rent vs. Buy analysis with the latest asking prices and rents from March, April, and May 2013. Following our standard approach, we calculated the cost of buying and renting for identical sets of properties, including maintenance, insurance, taxes, closing costs, down payment, sales proceeds, and, of course, the monthly mortgage payment on a 30-year fixed-rate loan with 20% down and monthly rent. We assume people will stay in their homes for 7 years, deduct their mortgage interest and property tax payments at the 25% tax bracket, and get modest home price appreciation (see the detailed methodology and example here). Here’s what we found:

Buying remains cheaper than renting so long as mortgage rates are below 10.5%. At 3.9%, the current 30-year fixed rate according to Freddie Mac, buying is 41% cheaper than renting nationally. With a 5% mortgage rate, buying is still 34% cheaper than renting nationally. Mortgage rates would have to rise a huge amount – to 10.5% – to tip the math in favor of renting, which isn’t impossible. Rates were that high throughout the 1980s, but have been consistently below 10.5% since May 1990.

Each local market, of course, has its own mortgage rate “tipping point” when renting becomes cheaper than buying a home. At 3.9%, buying is cheaper than renting in all of the 100 largest metros, which means the tipping point is above 3.9% everywhere. The tipping point is lowest in San Jose, which would tip in favor of renting if rates reach 5.2%. It’s between 5% and 6% in San Francisco and Honolulu, and between 6% and 7% in New York and Orange County, CA.

10 Metros with the Lowest Mortgage-Rate Tipping Point

# U.S. Metro Mortgage rate below which buying is cheaper than renting
1 San Jose, CA

5.2%

2 San Francisco, CA

5.4%

3 Honolulu, HI

5.8%

4 New York, NY-NJ

6.8%

5 Orange County, CA

6.8%

6 Los Angeles, CA

7.5%

7 San Diego, CA

7.5%

8 Ventura County, CA

8.0%

9 Sacramento, CA

8.0%

10 Oakland, CA

8.2%

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Buying a Home 44% Cheaper than Renting Despite Rising Home Prices Visualization Preview

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Buying a Home 44% Cheaper than Renting Despite Rising Home Prices

Low mortgage rates have kept homeownership less expensive than renting in all 100 large metros

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

1 San Francisco, CA

-19%

-35%

2 Honolulu, HI

-23%

-26%

3 San Jose, CA

-24%

-38%

4 New York, NY-NJ

-26%

-26%

5 Albany, NY

-30%

-34%

6 Orange County, CA

-32%

-41%

7 San Diego, CA

-33%

-42%

8 Los Angeles, CA

-35%

-37%

9 Long Island, NY

-36%

-34%

10 Ventura 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.

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Buying A Home Is 45% Cheaper than Renting Visualization Preview

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Buying A Home Is 45% Cheaper than Renting

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.

Jed Kolko, Chief Economist
September 13, 2012

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.

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