Buying A Home Is Now 38% Cheaper Than Renting
Is renting or buying a better financial bet? Every six months, Trulia’s chief economist Jed Kolko runs the numbers to answer that question and help you stay on top of the trends. So what does Trulia’s Winter 2014 Rent vs. Buy Report tell us? Although the gap between renting and buying is narrowing across the U.S., homeownership is still 38% cheaper than renting.
Homeownership remains cheaper than renting nationally and in all of the 100 largest metro areas according to Trulia TRLA -2.21%’s latest Winter Rent vs. Buy report. 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.
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, the economists 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.
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, like ours here in Charlotte, NC, the cost of buying versus renting is cheaper- especially with interest rates hovering around 4.50 %! In the Carolinas, we hover somewhere in the 20% range, (cheaper to buy than to rent), with urban cities like Charlotte, or Raleigh, NC leading the surge.
The bottom line: Buying Beats Renting Until Mortgage Rates Hit 10.6%
Even though prices increased in most 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.
Thanks, Trulia, for all of the good data. But, really, what does it mean to me personally?
Here’s a Realtor’s take on all of this data:
Non-withstanding all the numbers, above, I am going to add some other wrinkles to the equation for you to think about when measuring the equation.
When you rent a home, you don’t get any of the benefits of home ownership- which would be mortgage deduction, which can be substantial, as well as the ability to write off the majority of your property taxes. Don’t kid yourself- if you are renting, you still pay these “fees”, but it’s in the form of rent (your landlord is covering those costs in the rental of the unit- and the landlord is the one who now benefits from the write offs,- not you)!
For argument’s sake- let’s assume that you are comparing renting a 1400 square foot, 3 bedroom, 2 ½ bath condo in Uptown Charlotte, that rents for the market rental rate of $1700.00- versus purchasing a 2300 square foot, 4 bedroom, 2 ½ bath home in the same area of Charlotte, NC, priced at $260,000.
The home sales price that you and your Realtor negotiate for the home ends up being $250,000 (and in the Charlotte, NC and Charleston, SC markets, the seller may even kick in additional money towards closing costs and a warranty, on top of the money off of the sales price, depending on what else you are asking for in the offer. Closing costs in our area generally range somewhere between 2 to 3 % of the loan value- usually with a max contribution of no more than 6 % from the seller).
You can use the free mortgage calculator on our website and check the estimated payment on any loan amount by clicking on: http://www.newhomesnc-sc.com/mortgage/calculator. Keep in mind that this will not take into account any closing costs that you or the seller pay towards your loan, which will be on top of your down payment.
Okay, so you found a couple of great options. You looked at your finances, got pre-approved by a local lender, ran the mortgage calculator to get a comfort level for what you can realistically afford, and have decided that IF you buy a place, you are going to put down a 10 % down payment. You decided that if you decide buy versus rent, you will plan on getting a fixed rate, 30 year loan, currently at 4.50 %- this with no points (which is a fancy term for extra money paid to the lender to buy down the interest rate).
Here’s how the math works: Assuming you are in a 34 % tax bracket (this changes with your income level, so check with your accountant if you are not sure), here’s how it breaks down as a comparison:
For a home worth $250,000 with a 30 year, fixed rate loan of 4.50 % and a 10 % down payment, vs. renting a similar place for $1700 a month in rent:
Sales Price of Home: $250,000.00 *See Note, below
– Down payment of 10 %: -$25,000.00
= Financed/ Mortgage Amount of: $225,000.00
If you are obtaining a mortgage, here’s your PITI (Principal, Interest, Taxes and insurance), or total housing payment, based on a $225,000.00 mortgage for 30 years @ 4.50 %, assuming you have a tax bracket of 34%:
Principal and interest: $1140.00
Taxes (City of Charlotte): $267.50
Homeowner’s Insurance: $28.00
Total Monthly House Payment: $1687.50
- Note: In the above example, the property taxes are based on the tax value or sales price of $250,000.00, The principal and interest are based on the lower, mortgage financed amount of $225,000.
Now, here’s the fun part, and what most people miss when looking dollar for dollar at renting versus buying:
You can write off a BIG portion of your mortgage payment and taxes, so this is how it compares, financially speaking. Here’s how to figure it out:
STEP ONE: Take your Principal and Interest payment and multiply times your tax bracket- in this case, $1140.00 x 34 %. That figure is: $387.60.
STEP TWO: Subtract the $387.60 from the P & I of $1140.00, which equals $752.40
STEP THREE: Take your Property Taxes and multiply times 98 (since you can write off only 98 % of your taxes). That figure, using our example, above, is $262.15. That you write off and take off as a debt. That’s all of your property taxes, less a difference of – $5.35 per month. That leaves you with a write-off for taxes in the amount of $262.15.
STEP FOUR: Subtract the amount of taxes that you cannot write off from the total monthly tax bill, which is the $5.35, and add it to your revised monthly Principal and Interest. That means taking the $752.40 and adding $5.35, the portion that you cannot write off and have to pay for, (just like rent)- for a total of $757.75.
So, by breaking it down, you can see that your actual payment for the home is really more like $757.75, compared to what “seemed” like the cheaper option of renting a home for $1700.00!
Renting a Home– Monthly Payment- Actual Cost: $1700.00
Buying a Home– Monthly Payment- Actual Cost: $757.75
Monthly Difference / Savings to buy your home, versus renting one: + $942.25
This is NOT a “slash in the pan”, trick of hand game to convince you to buy a home. It is the ACTUAL SCENARIO, using REAL MATH, and the tax benefits that are available to all of us in the United States of America- and it’s a classic example of why many people BUY instead of RENT a home.
Of course, on TOP of all of this good news, most economists agree that since the housing crash first hit in late 2007, we have hit the “bottom of the barrel”, statistically speaking, of downward trends in housing prices in most markets, nationwide.
Home prices are starting to trend upward in a major way- which means that if you rent for another year or two, you may be paying 20 % (or more) for the same, exact home!
Any accountant will tell you that anything that appreciates in value positively adds to your overall financial well-being, and therefore, contributes to your bottom line. A car is generally a depreciating asset, unless you are a collector. A house is historically an appreciable asset (depending on what you buy it for and what you sell it for- sometimes even taking a loss can helps you, tax wise). A good general rule of thumb is to buy your home if you feel that you are going to be in the home long enough for it to make sense for you to not rent (ie, two to seven years), so you can take advantage of the mortgage deductions, home appreciation and tax advantages when you sell.
Now, if you are not sure that you want to stay in your current job or city or don’t want the hassle of home ownership (paying out of pocket for repairs), then maybe buying a home is not for you.
However, keep in mind, that there are Home Warranty companies that can take care of a service call for $65.00 a trip. You will pay for a yearly policy (they run about $369.00 per year in our market), and you can use it for most repairs that come up, with that trip charge as your only additional cash outlay. For example, the water heater stops working or the dishwasher needs repair. When you rent, it is obviously your landlord’s responsibility to repair anything mechanical or structural that breaks down. But, remember, HE is the one pocketing the tax and mortgage interest deductions savings every month and every year, so he probably has wiggle room in there for repairs!
And, true, in the above scenario, you have to come up with a down payment. If you qualify, though, are plenty of lower down payment options out there. You may qualify for a zero down or reduced, FHA down payment (currently 3.50 %). If you are a law enforcement professional, and EMT, a teacher or a nurse, you may qualify for a $100 Down, Good Neighbor Next Door loan. If you buy a foreclosure, HUD or Bank REO home that is distressed and it needs repairs, you may qualify for a Streamlined 203 K FHA loan (to buy the home with a 3.50% down payment, PLUS, get money for future repairs). And, with most FHA loan programs, the down payment can even be a gift from a relative. See the link at: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/reo/goodn/gnndabot
No matter what type of financing you choose, if you buy the house in the above scenario for $250,000, and you sell it in five years for $300,000, you just made $50,000- or $10,000.00 a year. In today’s environment, making $10,000 per year on an initial investment of only $25,000 (the cash / out of pocket down payment in the scenario, above) is very difficult to do, even with a safe investment like a bank CD! You certainly won’t make that at the current market investment rate of 2 percent!
How about EVEN MORE good news? When you sell that house to move up to buy a bigger one, you get to WRITE OFF THE TAX / ie, PROFIT, without paying “Capital Gains taxes” on the transfer of the money (like you would if you sold shares of stock). That’s right- you can write off $250,000 (if filing separately), or $500,000 of the profit (if filing jointly / married)- ALL OF IT 100 % TAX FREE! You can do this, again and again- not just one time, like in the past! One caveat, though- you have to physically live in the home for 2 out of 5 years to use this tax advantage. It can’t be just a rental. Sure, you can rent it for three out of five years- but you have to actually live there for 2 years during that 5 year minimum time frame.
That’s a serious use of smart money that any one can take advantage of! See this article, brought to you by www.Bankrate.com, for an easy explanation of how to use the $250,000 / $500,000 exclusion: http://www.bankrate.com/finance/money-guides/home-sale-capital-gains-1.aspx
That’s it in a nutshell, folks! If you have any further questions or comments, feel free to comment or contact me to discuss how it applies to your specific situation.
Please note that we are not accountants or economists, and your situation may differ from the above scenario. But, generally, this is a good ‘rule of thumb” to use as a guide as to whether buying or renting is the best option for you.
Have questions or want to see what is available for sale in the Charlotte, NC or Charleston, SC areas? Contact me for a list of properties in your area:
Direct: 704-905-4062 or Toll-Free: 1-877-372-2252
Kristen Haynes, Realtor, BIC, GC, CMRS New Home Buyers Brokers / Realty Pros
Email: khaynes@newhomesnc-sc.com
Web: http://NewHomesNC-SC.com
http://www.youtube.com/watch?v=0VT-dxbePQs&feature=youtu.be
Broker In Charge, Unlimited Building General Contractor, Certified Military Residential Specialist
Boards: 2009-2014, Professional Standards Committee, Charlotte Regional Realtor Association
2008-2009, Independent Broker Owner Council, Charlotte Regional Realtor Association
Member: Charlotte Regional Multiple Listing Service, Charleston-Trident Multiple Listing Service, National Association of Realtors, National HUD Broker, Charlotte Regional Realtor Association, NC Licensing Board for General Contractors, BBB. EHO.
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