Posted 02/01/2018

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Buy or rent? Buying still beats renting in most markets

buy or rent

Erik J. Martin

The Mortgage Reports Contributor

Buy or rent: an age-old debate

Is it better to buy or rent a home? The answer depends on many factors. These include your market, the local housing supply, your financial means, and interest rates.

New data show that buying costs less than renting in most markets. When that’s the case, the choice becomes obvious: it often makes more sense to buy than rent.

To help you decide, crunch the numbers and review your goals. Think about short- and long-term plans, like growing a family and building wealth. And talk to experts who can help you weigh the pros and cons.

Verify your new rate (Feb 23rd, 2018)

What the research found

A new report by ATTOM Data Solutions had some notable findings:

  • Buying a home is cheaper than renting in 54 percent of markets reviewed. More precisely, purchasing a median-priced home is more affordable than renting a three-bedroom property in 240 of 447 U.S. counties.
  • Markets where renting was costlier than buying include Dallas, Miami, San Antonio, Detroit, Philadelphia, Tampa-St. Petersburg, Cleveland, Pittsburgh and Saint Louis.
  • Yet 64 percent of Americans live in markets where it’s cheaper to rent than buy. This was true in 14 of the country’s most populated counties and in 30 of 39 counties with a population of 1 million or more.
  • Markets, where it’s more affordable to rent than buy, include Los Angeles, Chicago, Houston, Phoenix, San Diego, Miami, New York City, Seattle, Las Vegas, San Jose, San Francisco and Boston.

How to decipher the data

Daren Blomquist, senior vice president for ATTOM Data Solutions, says these findings provide pros and cons for both options.

“It’s still more affordable to buy than rent in the majority of markets,” he says. “But 64 percent of the population live in markets that are more affordable to rent than buy.”

Not ready to be a homeowner? Buy a rental now and move in later

Buying remains less expensive in most markets for a key reason.

“There are still a plethora of smaller markets where home price appreciation has remained slow and steady during this housing recovery,” says Blomquist. “But those tend to be the markets with less opportunity for finding a job. These are also markets where folks are often more transient. This causes them to rent more often. And that puts more upward pressure on rents.”

Where rents make sense

Meanwhile, renting is a better bargain than buying in the best job markets.

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“That’s because home prices over the past five years of this housing boom have steadily been rising faster than rents. Also, both rents and home prices have been rising faster than wages,” he says.

“This has created the problem we have today where, in many markets, neither renting nor buying is very affordable. But renting there is the lesser of two costly evils, chiefly in major population centers.”

Areas buyers should target

Ask Blomquist and he’ll tell you that certain cities stand out as good bargains for buyers.

“Parts of Dallas, Miami, San Antonio and Tampa are all still more affordable to buy than rent. And those markets also have solid economies with plenty of jobs available,” he says.

But bank more on renting in areas like New York City, Seattle, San Jose, San Francisco and Boston.

“These markets have access to many high-paying jobs. Yet I would recommend caution before buying there,” says Blomquist. “That is, unless you are very comfortable from an affordability standpoint. You also need solid employment and should plan to stay put for at least five years.”

What else to think about

If you can’t quite afford to buy today, it’s okay. It can be wise to rent for a spell and try to save up for a down payment to be used when you’re ready. Just prepare to make sacrifices and live within your means.

“If affordability is an issue, renting creates much less risk than stretching financially to buy a home. Certainly home ownership is a worthy goal I would recommend for most people,” he says. “But it’s not always the right time or market conditions to buy.”

Yet if the costs are close, remember the perks of owning.

Live in your rental building and call it a primary residence

“There are benefits to home ownership that may outweigh the fact that it might be a bit less cheap than renting in some markets. Those include building home equity and income tax deductions. There’s also the freedom that owning provides,” Blomquist says.

If you don't want a landlord dictating your decor, pet or gardening choices, homeownership might mean more to you than just the wealth you might build. But it's also a "forced savings" that can pay off in the future. According to Harvard University's Joint Center for Housing Studies, homeowners build on average 15 times the wealth of renters, and most of that does take the form of home equity.

A self-quiz

To help you choose, answer these questions:

  • Do you plan to move in less than five years? If so, “renting is likely a better option,” notes Blomquist. “That’s because the upfront costs of owning may not be regained by the benefits if you own for less than five years. Also, there is more risk over the short term that home prices may not increase.”
  • How much income would you need to put toward housing if you purchased? “If it’s above 45 percent, it may be better to rent. This is true even if renting also requires the same percentage of your income,” he says. “Ideally you want to spend no more than 35 percent of your income on housing. But that is not practical in many markets.”

There may be exceptions -- for instance, in an expensive rental market, you may plan to keep your house after you move. The income could cover the ownership costs as you build equity. And the tax treatment of rental property is very favorable.

Another option is buying a multi-unit home, occupying one of the units, and let your tenants offset your ownership costs. You can even use an FHA loan for this, with 3.5 percent down. Or plan on getting a roommate to make your home more affordable.

What are today's mortgage rates?

Current mortgage rates have climbed recently, but are still highly affordable, especially when compared to the rent increases in many markets. And once you have a fixed-rate mortgage, you don't have to worry about annual increases. Those who expect to keep the property for just a few years can shave their rate down by choosing an ARM fixed for three, five, seven or ten years.

Verify your new rate (Feb 23rd, 2018)

Erik J. Martin

The Mortgage Reports Contributor

Erik J. Martin has written on real estate, business, tech and other topics for Reader's Digest, AARP The Magazine, The Chicago Tribune and his blog, Martinspiration.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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