Declining home values coupled with historic low interest rates have not been enough to get able homebuyers off the fence when it comes to buying a home. However, the latest figures regarding the state of the rental market may motivate potential homebuyers who have trouble deciding between renting versus buying.
Of 100 markets surveyed by Trulia, it was more affordable in 98 of the areas for people to own their own homes than to rent. The online real estate firm reports that the convergence of low mortgage interest rates and upward trending rent prices has created an advantage for the average person to own their home.
The top five areas where it was cheaper to buy a home then rent are as follow:
- Detroit, MI
- Oklahoma City, OK
- Dayton, OH
- Warren, MI
- Toledo, OH
These cities tend to be older and have experience low or negative population growth. Honolulu and San Francisco represent the two cities polled in the survey where renters fared better than homeowners.
“Catch 22” for Renters Planning to Buy
Since the financial crisis of 2008, many potential homebuyers have delayed purchasing a home because of the uncertainty in the employment market and economy. A significant number of buyers have found purchasing a home difficult because of tighter credit underwriting standards or the inability to meet higher down payment requirement. Some mortgage lenders require borrowers to make 10% to 20% down payments.
Trulia’s top economist Jeb Kolko says rents trending higher presents issues for renters who plan to purchase a home in the future. The higher the rents, the less likely renters can save the down payment necessary for a home.
Vacancy Rates and Rent Increases
According to the National Association of Realtors chief economist Lawrence Yun, the rental vacancy rates continue to fall and rent increases accelerated the “fastest” in the multifamily rental market. Hun warns of further rent increases, in the “near to medium term,” if construction activities for residential apartment building do not pick up.
Last year, rent increased 2.5%, which the Department of Labor reports as the highest rent increase in years. Market analysts expect rent prices to go up about 3.8% in 2012 and 4.0% in 2013.
The Financial Cost of Renting
To get a better idea of the comparison, homebuyers who purchase a $110,000 home ( 15 or 30-year fixed rate mortgage) with a $1,000 monthly payment, fare better than a renter who start out paying $800 per month and face rent increases of 5% per year.
Including tax benefits to homeowners, following are the potential annual savings for the homeowner:
Year 1 - $ 600
Year 2 - $120
Year 3 - $384
Year 4 - $912
Year 5 - $1,464
Year 6 - $2,052
Year 7 - $2,664
From a financial standpoint, the numbers clearly show that, in times of high rent increases, renters should analyze the monthly saving in living costs along with other details of their personal circumstances to make an informed decision.
Deciding Whether to Rent or Buy
The drastic decrease in home values over the past five or six years and the difficulty in the market finding a bottom have influenced the decisions of many people not to buy. Based on the S&P/Case-Shiller Housing Price Index, housing has dropped 35 percent below off the peak reached in late 2006.
In August 2011 MortgageRefinance.com created an infographic that shows the many advantages which homeownership offers. It only seems today those reasons have increased. To see our infographic visit MortgageRefinance.com to rent or to buy infographic.
In areas of cheap rents, buying might make sense financially, depending on your personal circumstances. History has also show that homeowners tend to have a net worth 31 to 46 times that of renters. When homebuyers consider making a purchase they usually investigate factors like mortgage interest rates, property location and home values as part of their decision-making process.
Following the advice of Center for Economic and Policy Research economist Dean Baker, one approach to use when determining the benefits of buying versus “renting,” when the price-to-rent ratios or the average fair market values of homes equals 15 times gross rent.