Still Cheaper to Buy Than Rent

03/24/2014 at 4:14 pm  •  Posted in Buying a Home, Dream Blue, Real Estate Advice, Real Estate News, Real Estate Trends, Tips by Blog Team  •  0 Comments

By Dick Greenwood, Director, Builder Marketing
Jed Kolko, chief Economist of Trulia released a research study the last week of February, 2014 which showed that in most of America it is cheaper to buy than rent. The study showed that in Chicago, it is 47% cheaper to buy than rent. The St. Louis market is 54% cheaper to buy than rent. And in Milwaukee, it is 51% cheaper to buy. Trulia research compared the costs of owning and renting, assuming buyers got 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 the costs and proceeds from buying or renting over an entire seven year period. Buying a home remains cheaper than renting in all of the 100 largest metro areas. One might ask how is this possible with mortgage rates increasing? Two points: the mort-gage rates are still historically low and secondly, rents in most markets have risen sharply.
The rent vs. buy math differs across the United States since local markets have their own normal levels of prices and rent. Two very significant local variables are property taxes and home price appreciation. Considering all the variables, buying ranges from just 5% cheaper than renting in Honolulu to 66% cheaper than renting in Detroit. Buying is a tougher call in the most expensive markets in California and New York. However in most markets, buying beats renting until mortgage rates hit 10.6%, then renting becomes cheaper than buying.
I know some are thinking what if I don’t live in the home for at least seven years and I don’t itemize my tax deductions. In these cases, the gap between buy vs. rent gets small-er and smaller until it starts to tip toward renting. Most experts dismiss this by saying you should never look at the house as a short term investment (less than 5 years), housing is a long term investment.
One thing I like about the Trulia study is that they used a very conservative annual home price assumption that ranges between 1.7% and 3.1% depending on the metro. They did not take the 12% increase we saw in 2013. Jed Kolko said it best when he said “If the last bubble taught us anything, its that excessive optimism about future home prices can lead to foolish decisions and heartbreak.”

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