Buying is Still Cheaper than Renting!

My last blog was about how the interest rate is rising and how it could be costing the potential home buyer more money to wait to purchase a property.  This week I will be discussing how even though interest rates are creeping up it is still cheaper to buy a home than to continue renting and paying someone else's mortgage!

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?

We updated our Rent vs. Buy analysis with the latest asking prices and rents from March, April, and May 2013. 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.

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. 

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%

 But for 78 of the 100 largest metros, the tipping point is 10% or higher. In fact the tipping point is above 20% in Cleveland, Memphis, Detroit, and several other metros in the Midwest and South.

10 Metros with the Highest Mortgage-Rate Tipping Point
#	U.S. Metro	Mortgage rate below which buying is cheaper than renting
1	Detroit, MI	35.8%
2	Memphis, TN-MS-AR	21.0%
3	Gary, IN	20.8%
4	Warren-Troy-Farmington Hills, MI	20.2%
5	Toledo, OH	20.1%
6	Cleveland, OH	20.0%
7	Dayton, OH	19.2%
8	Grand Rapids, MI	18.4%
9	Akron, OH	17.4%
10	Kansas City, MO-KS	16.9%

As you can see from the charts above, the immediate New England area is not within these calculations.  The cost to buy a new home in the Boston/South Shore area continues to remain less expensive than renting !

Of course, the tipping point also depends on how long you plan to stay in your next home (we assume 7 years) and whether you itemize your deductions (we assume you do). For instance, if you don’t itemize, or if the mortgage interest and property tax deductions were eliminated entirely, buying would still be 29% cheaper than renting at a mortgage rate of 3.9%, and the tipping point when renting becomes cheaper than buying would be 7.5%.

So, if you have the resources to buy, what's making you hesitate?  

Is Now the Time to Buy a House?

The real estate community is often criticized for always seeming to have a Pollyanna attitude about the housing market. Many believe that the industry’s current call ‘to buy now’ is nothing more than a scare tactic with the sole purpose of creating more commissions for the industry. Let’s take a look at whether or not that advice was good advice over the last year.

According to the most recent S&P Home Price Index home values have risen over 10% in the last year. If we look at Freddie Mac’s Weekly Primary Mortgage Market Survey®, the 30 year mortgage rate has increased from 3.67% to 3.91% during that same period.

Take a Look at the Following Table Comparison:

*We can see that the advice to buy a year ago made complete financial sense.

Regarding interest rates, the 30 year mortgage rate has soared by over a half point already this year and many believe that the increases will continue. Even those trying to be the voice of reason on this issue are projecting higher rates, going up to as high as 5%.

Bottom Line

The next time a real estate professional says that now is the time to buy they may not be giving you a ‘sales pitch’. They may be giving you nothing but excellent advice.

Housing Bubble: Is There a New One Forming?

Are we in another Housing Bubble like the one of 2005-2006?

The housing market is recovering so nicely that it has caused some to wonder
whether a new housing bubble is forming.  Trulia revealed some great data on this point in a recent blog post. They explained that, even with the recent price increases, national home prices are still 7 percent undervalued.

Three reasons there will NOT be another bubble

Prices are determined by the ratio between supply and demand. Here are three reasons a bubble will be avoided.

1. Supply is beginning to increase. A lack of inventory is creating a market of multiple bids which has caused prices to rise. The National Association of Realtors (NAR), in their latest Existing Home Sales Report, revealed that the months’ supply of inventory has increased from 4.3 to 5.2 months since January.
2. Demand will decrease in certain demographics. For an example, investors have been a large part of the housing market over the last several years. As prices continue to rise, a certain percentage of these buyers will back off.
3. As mortgage rates increase, buyers will be able to afford less. The Mortgage Bankers Association, Fannie Mae and NAR have all projected an increase in mortgage rates over the next year. Buying power will decrease as borrowers can no longer afford the same price point as monthly payments will increase.

For these reasons the fear of a new housing bubble are currently unfounded.