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Where HOA Fees Make Renting Cheaper Than Buying a Home Visualization Preview

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Where HOA Fees Make Renting Cheaper Than Buying a Home

Nationally, buying with a traditional 20% down payment and 30-year mortgage is 35% cheaper than renting. But homeowner association (HOA) fees can make the decision more difficult in metro New York and Honolulu.

Homeownership remains cheaper than renting in all 100 largest U.S. metro areas. In fact, buying is 35% cheaper than renting now, compared with 33% cheaper one year ago. Paradoxically, home price growth nationally has outpaced rents over the past year. So what gives? Two things. First, the 30-year fixed-rate mortgage rate has fallen from 4.5% in 2014 to 3.87% today (as of April 15). Second, the 3.9% home price gain wasn’t much larger than the 3.7% gain in rents. In the past year, these two trends have made homeownership even more affordable compared with renting.

Trulia’s Rent vs. Buy Report assumes a traditional 30-year fixed rate mortgage with a 20% down payment. But for those looking to buy a home, apartment, or condo with homeowner association (HOA) fees, the extra cost could make renting a more attractive option.

Our method for calculating the total costs of buying and renting follows these steps:

  • We use our quality-adjusted measure of home prices and rents, which allows an apples-to-apples comparison between rental and owner-occupied housing units. For this report, we looked at all the homes listed on Trulia for rent or sale in March 2015.
  • We calculate the initial total monthly costs of owning and renting, including mortgage payments, maintenance, insurance, and taxes. We make a separate calculation that factors HOA fees into the rent vs. buy equation.
  • We calculate the future total monthly costs of owning and renting, taking into account expected price and rent appreciation, as well as projected inflation.
  • We factor in one-time costs and proceeds, including closing costs, down payment, sale proceeds, and security deposits.
  • We calculate net present value, which tells us the opportunity cost of using money to buy a house instead of investing it. Net present value is the worth in today’s dollars of a future stream of payments and proceeds, taking into account expected interest rates.

To compare the costs of owning and renting, we assume buyers get a 3.87% 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, considering all costs and proceeds from buying or renting over the seven-year period. You can read our methodology here.

The interactive Rent vs. Buy map shows how the math changes under alternative assumptions for mortgage rates, income tax brackets, number of years in the home, and HOA fees, if any. To estimate HOA costs, we combed through Trulia’s for-sale listings and calculated the median homeowner’s fee for each of the 100 largest metro areas.

Trulia’s Rent vs. Buy Calculator lets you compare renting and buying costs using whatever assumptions about prices, rents, and other factors you want, including HOA fees. It uses the same math that powers our interactive map and this report.

Tougher Call between Renting and Buying in Honolulu and California
While homeownership is 35% cheaper than renting nationwide, the gap differs vastly across metros, largely because each market has its own typical prices and rents, as well as distinct patterns in property taxes and home-price appreciation. Taking all these factors into account, buying a home ranges from being 16% cheaper than renting in Honolulu to being 55% cheaper in Sarasota, FL.

Generally, it’s a closer call in California and an easier call in the South. What’s more, in seven of the 10 housing markets where buying has the smallest edge over renting, the buying advantage actually increased in the past year. On the other end of the spectrum, the buying advantage widened in six of the 10 markets where buying has the biggest edge. 

RentvsBuy_Map

Where Buying a Home is a Tougher Call

# U.S. Metro Cost of Buying vs. Renting (%), Spring 2015 Cost of Buying vs. Renting (%), Spring 2014 Difference (% points), 2015 vs. 2014
1 Honolulu, HI -16% -10% -7%
2 San Jose, CA -17% -11% -6%
3 Lancaster, PA -19% -16% -3%
4 Sacramento, CA -22% -22% 0%
5 San Francisco, CA -24% -17% -7%
6 Ventura, CA -25% -25% 0%
7 Los Angeles, CA -26% -24% -2%
8 Madison, WI -26% -24% -2%
9 Seattle, WA -26% -23% -3%
10 Modesto, CA -27% -32% 5%

 

Where Buying a Home is an Easier Choice

# Metro Cost of Buying vs. Renting (%), Spring 2015 Cost of Buying vs. Renting (%), Spring 2014 Difference (% points), 2015 vs. 2014
1 Sarasota, FL -55% -56% 1%
2 Fort Myers, FL -54% -52% -2%
3 Baton Rouge, LA -53% -50% -3%
4 New Orleans, LA -52% -53% 1%
5 Miami-Fort Lauderdale, FL -50% -52% 2%
6 Columbia, SC -50% -46% -4%
7 Chattanooga, TN -50% -45% -5%
8 Oklahoma City, OK -50% -46% -3%
9 Charleston, SC -49% -45% -4%
10 Tampa, FL -49% -49% 0%
Note: Negative numbers mean that buying costs less than renting. For example, buying a home in New Orleans is 52% cheaper than renting in 2015. Trulia’s Rent vs. Buy calculation assumes a 3.87% 30-year fixed-rate mortgage with a 20% down payment, itemizing tax deductions at the 25% bracket, and staying seven years in the home. Year-over-year differences are rounded to the nearest percentage point, and the difference was calculated before rounding; therefore, the rounded difference might not equal the difference between the rounded shares.  Click here to download the full Rent vs. Buy cost considerations for the 100 largest U.S. metros.

HOA Fees Can Make a Big Difference in the Rent vs. Buy Decision
If you are a homeowner association member, you need to factor in your HOA fee into your monthly housing costs. What these fees cover varies, but they can include everything from landscaping and maintaining public spaces to utilities and cable TV. The fee amounts also vary and, in some areas, you might have to pay a lot.

The New York and Honolulu metropolitan areas top the list of markets with the most expensive HOA fees, with medians of $575 and $438 per month respectively. Fort Myers, FL, Riverside, CA, and Miami, FL round out the top five with median HOA fees between $310 and $356. In these high-fee markets, HOA costs can make a significant difference in whether it’s better to rent or buy. 

RentvsBuy_HOAfees_Chart

To understand how much difference these costs make, we’ve factored in the median HOA fee for each of the 100 largest metros in our rent vs. buy analysis. If you want to know how much a homeowner fee on a specific property will affect your housing costs, Trulia’s rent vs. buy calculator allows you to plug in the fee amount in the advanced settings.

When we factor in the median HOA fee, the buying advantage almost disappears in some markets. In the New York metro area, buying a home becomes just 4% cheaper than renting, compared with 27% cheaper without the fee. And in the Honolulu metro, renting actually enjoys a 1% advantage when HOA fees are considered.

 

Without those fees, buying is 16% cheaper than renting. In some other markets, even though it’s still cheaper to buy a home with HOA fees than to rent, the swing can be large. For example, Melbourne, FL’s median HOA fee of $266 per month on a median-price house makes buying there 23% cheaper than renting, a swing of 22 percentage points from 45% cheaper without the fee. Other metros with similar swings include Youngstown, OH (48% vs. 28%), Fort Myers, FL (54% vs. 34%), and Riverside, CA (34% vs. 16%).

RentvsBuy_Hawaii

Where HOA Fees Matter Most in Rent vs. Buy Math

# U.S. Metro Cost of Buying vs. Renting with HOA Fee (%), Spring 2015 Rent Vs. Buy Difference with and without HOA Fees (% points) Median Monthly HOA Fee ($)
1 Honolulu, HI 1% 17% $438
2 New York, NY -4% 24% $575
3 San Jose, CA -8% 9% $290
4 Lancaster, PA -13% 6% $67
5 Portland, OR -14% 13% $220
6 Los Angeles, CA -15% 11% $285
7 San Francisco, CA -15% 9% $300
8 Madison, WI -15% 10% $152
9 San Diego, CA -15% 12% $296
10 Ventura, CA -16% 9% $230

By contrast, metros like Baton Rouge, LA and Oklahoma City, OK—where the median HOA fee will set you back only $30 and $22 per month respectively—are a bargain compared with New York and Honolulu. Furthermore, HOA fees in those areas are relatively cheap relative to median house prices, so they hardly affect the renting vs. buying calculation. In places where buying is the best deal even with HOA fees, the added monthly costs reduce the buying advantage by just 1-2 percentage points.

Where HOA Fees Are a Drop in the Bucket

# U.S. Metro Cost of Buying vs. Renting with Median HOA Fee (%), Spring 2015 Rent Vs. Buy Difference with and without HOA Fees (% points) Median Monthly HOA Fee ($)
1 Baton Rouge, LA -51% 2% $30
2 Sarasota, FL -51% 5% $92
3 New Orleans, LA -48% 4% $63
4 Oklahoma City, OK -48% 2% $22
5 Columbia, SC -47% 3% $33
6 Jackson, MS -47% 2% $27
7 Charleston, SC -46% 3% $43
8 Houston, TX -46% 3% $44
9 Greenville, SC -46% 3% $38
10 Memphis, TN -46% 2% $25

To see how much HOA fees add to your monthly mortgage costs, we’ve compared the median monthly mortgage payment with the median fee in the five lowest and highest HOA markets. In markets with the highest HOA fees, the effect is substantial. In Honolulu, the extra hit is 19% and, in Fort Myers, FL, a whopping 50%. But, in markets with the lowest HOA fees, the change is slight. HOA fees add just 2% to your monthly mortgage payment in Sacramento, CA, and just 5% in Little Rock, AR, Indianapolis, IN, and Oklahoma City, OK.

RentvsBuy_HOAMonthlyPayment_Chart

Furthermore, it’s not hard to come up with plausible scenarios in which HOA fees help make buying cost more than renting. Suppose a homebuyer wants to buy a condo with HOA fees. If this buyer is not itemizing tax deductions, only stays put for five years, and qualifies only for a 4.5% mortgage rate, then buying ends up costing more than renting in 29 of the 100 largest metros.

Those 29 metros include not only pricey coastal markets, but also in markets like Madison, WI, Milwaukee, WI, and Minneapolis-St. Paul, MN. In this scenario, buying costs 28% more than renting in New York City and 41% more expensive in Honolulu. So the moral of the story is: A condo might be within reach of most first-time homebuyers, but when you take HOA fees into account, it may make renting cheaper than buying.

Still, at the end of the day, if your dream home comes with HOA fees, it isn’t necessarily a deal breaker. Considering that some HOA fees bundle expenses you’d have to pay anyway, such as garbage, water, sewer, and building maintenance, the HOA fee could turn out to be a good deal. So when considering a home with HOA fees, be sure to find out exactly what those fees cover and factor it in to your overall housing budget.

Note: the detailed methodology and assumptions behind our Rent Vs. Buy model are here. Additionally, for our comparison of HOA fees, we used the median HOA fee of all properties in metro listed on Trulia in 2014.

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Buying Cheaper Than Renting, But Some Mortgages Make It a Closer Call

Jed Kolko, Chief Economist
October 15, 2014

Nationally, buying is 38% cheaper than renting with a traditional 20% down, 30-year mortgage. Buying is an even better deal with a 15-year mortgage, but not as favorable with less money down.

Homeownership remains cheaper than renting nationally and in all of the 100 largest metro areas. In fact, buying is 38% cheaper than renting now, compared with 35% cheaper than renting one year ago. Why is the gap widening? Two reasons. First, in the past year, the 30-year fixed-rate mortgage rate has fallen from 4.8% to 4.3%. Second, rents have risen faster than prices, excluding foreclosures. Together, these trends have made buying even more affordable versus renting than it was last year.

Our Rent Versus Buy model assumes a traditional 30-year fixed rate mortgage with a 20% down payment. But there may be good reasons for financing a home purchase other ways. Consumers tell us that the main obstacle to homeownership is the down payment. For those would-be homeowners – especially first-timers without savings or equity from another home – a low-down-payment mortgage might be the only option. For others, paying all cash might give them the deciding advantage over other bidders on a house. This edition of Trulia’s Rent Versus Buy report focuses on how different types of mortgages affect the math of buying versus renting.

Our method for calculating and comparing the total costs of buying and renting follows these 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 or rent from July, August, and September 2014. We estimate prices and rents for similar homes in the same neighborhood to get a direct apples-to-apples comparison. We are NOT just comparing the average rent and price of homes on the market. That would be misleading because rental and for-sale properties are very different. Most importantly, for-sale homes are on average about 50% bigger than rentals.
  2. Calculate the initial total monthly costs of owning and renting, including mortgage payments, 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 projected inflation.
  4. Factor in one-time costs and proceeds, like closing costs, down payment, sales proceeds, and security deposits.
  5. Calculate net present value to account for the opportunity cost of using money to buy a house instead of investing it. Net present value is the value in today’s dollars of a future stream of payments and proceeds, taking into account expected interest rates.

To compare the costs of owning and renting, we start by assuming that buyers get a 30-year fixed-rate mortgage at a 4.3% rate and make a 20% down payment. We then compare this mortgage with several other financing options, including all cash and an FHA loan. We assume people itemize their federal tax deductions and are in the 25% tax bracket. We also assume they stay in their home for seven years. In short, our Rent Versus Buy model takes into account all costs and proceeds from buying or renting over an entire seven-year period, including opportunity cost.

The interactive Rent Versus 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. What’s more, Trulia’s Rent Versus Buy Calculator lets you compare renting and buying costs based on whatever assumptions, prices, rents, and scenarios you want to look at. It uses the same math that powers our interactive map and this report. Our detailed methodological statement explains it fully.

Buying Versus Renting: Tougher Call in California and New York, Easier Choice in Midwest and South

Buying is 38% cheaper than renting nationwide, and buying is cheaper than renting in all of the 100 largest metros. In fact, buying is at least 20% cheaper than renting under our baseline assumptions in all of the 100 largest U.S. metros except Honolulu.

The gap in the costs between renting and buying differs across metros largely because each market has its own typical prices and rents. In addition, property taxes and home-price appreciation differ locally. Taking all these factors into account, buying ranges from 17% cheaper than renting in Honolulu to 63% cheaper than renting in Detroit. Generally, buying is a closer call relative to renting in California and New York, while the gap is widest in the Midwest and South.

blogpost map no 1

 

Even in the tougher-call markets, buying probably won’t become more expensive than renting soon. Home price increases are slowing. What’s more, at current prices and rents, mortgage rates would have to rise above 6% to make renting cheaper than buying in Honolulu. They’d have to climb near 7% for Orange County and San Jose to tip in favor of renting. The 30-year fixed-rate mortgage hasn’t been 6.1% since 2008.

Nationally, buying is a bit more affordable compared with renting now (38% cheaper) than a year ago (35% cheaper), thanks to the decline in mortgage rates. But in parts of the West where rents have risen faster than for-sale prices, the cost gap between buying and renting has widened significantly. In our summer 2013 report, buying in San Jose and San Francisco was less than 10% cheaper than renting, compared with more than 25% cheaper now.

Where Buying a Home is a Tougher Call
# U.S. Metro Cost of Buying vs. Renting (%),Q3 2014 Cost of Buying vs. Renting (%),Summer 2013 Mortgage Rate Tipping Point When Renting Becomes Cheaper Than Buying, Q3 2014
1 Honolulu, HI -17% -10% 6.1%
2 Orange County, CA -22% -20% 6.8%
3 San Jose, CA -23% -4% 6.8%
4 New York, NY-NJ -24% -21% 7.3%
5 San Francisco, CA -25% -9% 7.0%
6 Los Angeles, CA -26% -21% 7.3%
7 San Diego, CA -26% -21% 7.5%
8 Sacramento, CA -26% -26% 7.7%
9 Ventura County, CA -28% -22% 7.5%
10 Austin, TX -30% -30% 8.9%

 

Where Buying a Home is an Easier Choice
# U.S. Metro Cost of Buying vs. Renting (%),Q3 2014 Cost of Buying vs. Renting (%),Summer 2013 Mortgage Rate Tipping Point When Renting Becomes Cheaper Than Buying, Q3 2014
1 Detroit, MI -63% -65% 29.1%
2 Gary, IN -61% -58% 21.3%
3 Akron, OH -58% -51% 21.2%
4 Toledo, OH -58% -51% 21.0%
5 Cleveland, OH -58% -54% 21.4%
6 Kansas City, MO-KS -55% -53% 17.9%
7 Memphis, TN-MS-AR -54% -55% 17.8%
8 Grand Rapids, MI -54% -52% 18.0%
9 New Orleans, LA -54% -51% 15.2%
10 Birmingham, AL -54% -50% 15.7%
Note: Negative numbers mean that buying costs less than renting. For example, buying a home in Detroit is 63% cheaper than renting in 2014. Trulia’s Rent Versus Buy calculation assumes a 4.3% 30-year fixed-rate mortgage with a 20% down payment, itemizing tax deductions at the 25% bracket, and staying seven years in the home. Click here to download the full Rent Versus Buy cost considerations for the 100 largest U.S. metros: (PDF) or (Excel).

The Pros and Cons of Different Types of Mortgages

All the Rent Versus Buy calculations shown above assume a traditional 30-year fixed-rate loan with a 20% down payment. But many people can’t swing 20% down. Others might prefer to pay all cash or build equity faster. For those reasons, we examine other financing options. Let’s look at how different options play out for a $250,000 home that the owner sells after seven years. To keep things simple, let’s start out ignoring closing costs, home price appreciation, tax benefits, and many other things we do account for when we add these scenarios to our full Rent Versus Buy model, below.

  1. traditional 20% down, 30-year fixed-rate loan on a $250,000 home would carry a $990 monthly mortgage payment, including principal and interest. After seven years, the unpaid loan balance is $173,291, leaving equity of $76,709.
  2. All cash is just what it sounds like. You pay $250,000 upfront and that’s all equity at the end.
  3. For a 15-year fixed-rate loan, you still put 20% down. The average mortgage rate on a 15-year fixed-rate loan is most of a full point below that of the 30-year fixed rate. But the shorter term means a higher monthly payment of $1,428. The payoff is that the 15-year loan builds equity much faster: $130,507 after seven years.
  4. 10% down payment loan with private mortgage insurance requires less money upfront. But the higher initial loan balance means a larger monthly payment plus a mortgage insurance premium of $133 per month. Furthermore, the lower down payment and higher loan balance leave equity of only $55,048 after seven years.
  5. A 3.5% Federal Housing Administration (FHA) loan calls for a down payment of only $8,750 but requires upfront and ongoing mortgage insurance premiums. The higher initial loan balance means equity of just $38,748 after seven years. That’s about half what you’d have with a traditional 20% down, 30-year loan.
Understanding the Financing Options
For a $250,000 home Traditional 20% down, 30-year fixed All cash 15-year fixed, 20% down 10% down, private mortgage insurance 3.5% down FHA
Down payment $50,000 $250,000 $50,000 $25,000 $8,750
Monthly payment (incl. mortgage insurance) $990 - $1,428 $1,247 $1,441
Equity at 7 years (no appreciation) $76,709 $250,000 $130,507 $55,048 $38,748
Note: Monthly payment is principal, interest, and mortgage insurance premium. Mortgage rates for the traditional 20% down 30-year fixed (4.30%), 15-year fixed (3.48%), and FHA (4.00%) loans are from the Mortgage Bankers Association for the week ending October 3. We use the same rate for a 10% down payment loan as the traditional 20% down payment rate, based on current rate quotes. Monthly payment includes mortgage insurance calculated for the first year of the loan. For FHA loans, the insurance premium falls over time but remains on the loan; the FHA upfront premium is rolled into the loan balance. For the 10% down loan, we assume insurance gets taken off when equity reaches 20%. All dollar amounts are rounded to the nearest dollar.

How do you decide whether buying still beats renting with each of these financing options? The math gets complicated. For starters, the benefits of each option depend on how you would invest your money if you weren’t buying a home – that’s the “opportunity cost.” In addition, other factors, such as whether you itemize your tax deductions, also affect the relative benefits. Our Rent Versus Buy model factors all this in. So let’s see whether buying beats renting in all cases.

How to Make Buying an Even Better Deal – Or a Bad Idea

Remember that buying is 38% cheaper than renting nationally under our baseline model of a 20% down payment 30-year loan, tax deductions at 25%, and staying seven years. Let’s start by comparing the five financing options. In all scenarios, buying beats renting. The gap is widest for the 15-year loan, where it’s 43% cheaper to buy. It’s narrowest for the 3.5% FHA loan, where buying is 25% cheaper.

mortgage type graphic

 

The 15-year loan ends up costing least versus renting thanks to faster equity build-up and more of the mortgage payment going to principal rather than interest. Surprisingly, all-cash is a worse deal than a traditional 20% down, 30-year mortgage, although that hinges on our assumption about what you could earn if you didn’t tie up your money in an all-cash payment. (Geeks: we’re assuming a 3.5% nominal discount rate.) In addition, if you pay all cash, you lose the tax benefit of deducting mortgage interest. If you assume tax deductions aren’t itemized, there’s no tax benefit of getting a mortgage, which makes all-cash a better deal than a traditional 20% down, 30-year fixed rate mortgage.

The biggest shift is with the 3.5% down FHA loan, which makes buying only 25% cheaper than renting. In one of the 100 largest metros, Honolulu, buying with a 3.5% FHA loan is actually more expensive than renting. And, with this loan, buying beats renting only by 10% or less in San FranciscoNew YorkLos Angeles, and several other California metros.

Going further, it’s not hard to come up with realistic scenarios where buying costs more than renting in many local markets. For a millennial with little savings and no Bank of Mom and Dad, an FHA loan might be the only option. If our hypothetical twentysomething is not in a tax bracket that makes itemizing worthwhile and only stays put five years (those young people are restless), buying ends up costing more than renting in 27 of the 100 largest metros. Those 27 include not only pricey coastal markets, but also in markets like PhoenixLas Vegas, and Colorado Springs. On the expensive coasts, it’s not even close. For instance, in this scenario, buying costs 30% more than renting in Orange County. An FHA loan might be within reach for many first-timers. But, in many costly parts of the country, it doesn’t make buying cheaper than renting. Our interactive map shows this for all the 100 largest metros:

 

blogpost map no 2

So, to buy or to rent? Falling mortgage rates and rising rents mean that buying looks even better versus renting than one year ago, especially in California. But buying is not for everyone. If you live in a market that’s a close call, and you plan to stay less than seven years, don’t itemize your tax deductions, or need an FHA loan, buying might not be the clear-cut winner. Indeed, if many or all of these things apply to you, buying could end up costing far more than renting. Buying may be 38% cheaper than renting nationally. But there are still plenty of people for whom renting would cost less than buying, even if low down payment loans give them the option to buy.

Note: the detailed methodology and assumptions behind our Rent Versus Buy model are here. Additionally, for our comparison of financing options, we used mortgage rates from the Mortgage Bankers Association, along with our own mortgage-rate estimate for the 10% down scenario.

We used an annual private mortgage insurance premium rate of 0.71% (1.31% for larger loans) for the 10% down payment scenario based on the MGIC rate table. We assumed mortgage insurance premiums – unlike mortgage interest and property taxes – are not tax deductible, in line with current law, though that might change.

In the FHA scenario, we used a 1.35% annual mortgage insurance premium and amortized the 1.75% upfront mortgage insurance premium. In a handful of markets many homes are above the local FHA loan limit. Nevertheless, we included all metros in the FHA scenarios.

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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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