By: Jed KolKo, Chief Economist for Trulia
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.
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:
- 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.
- Calculate the initial total monthly costs of owning and renting, including the mortgage payment and rent, as well as maintenance, insurance, and taxes.
- Calculate the future total monthly costs of owning and renting, taking into account price and rent appreciation, as well as inflation.
- Factor in one-time costs and proceeds, like closing costs, down payment, sales proceeds, and security deposits.
- 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.