The economic downturn of the last several years had a profound impact on the housing market and home prices. When the housing market bottomed out, home prices were well below normal values, allowing many buyers to find a great deal with a low rate mortgage. As the economy has improved over the years and homeowners have begun to see their equity rise once more, many are wondering what is the true value of making a new home purchase compared to renting.
Trulia recently conducted a survey of 100 metropolitan housing markets across the country, measuring the cost of renting versus buying. In every market, Trulia found that owning a home is cheaper than renting. The overwhelming majority of markets had higher rent prices compared to monthly homeownership costs.
One reason it is less expensive and more cost effective to own a home in the current housing market is low mortgage rates. While rates have risen from their historic lows roughly one year ago, the average mortgage rate is still relatively low and affordable for the majority of homebuyers.
The difference between renting and owning a home varied across metro markets, though the report concluded it is 38 percent cheaper to own than rent nationally. In some markets, the difference was significantly higher. For example, in Detroit, where foreclosures and abandoned homes were frequently the focus of media attention during the recession, it is 66 percent cheaper to own a home than to rent one. In other metropolitan areas, the difference was much lower. The advantage to owning in Honolulu, for instance, was just 5 percent compared to renting.
The mortgage difference
The housing market has seen a great revival in the last year or two, mostly due to rising home prices and increased equity for homeowners. In addition those gains, foreclosures are down and many lending standards have been tightened to ensure that borrowers are able to afford their home loans. Despite higher home prices, buying has remained more affordable partially as a result of low mortgage rates.
Trulia also dug into when the gap between renting and buying would likely close. While mortgage rates are currently hovering under 4.5 percent, Trulia found it will be cheaper to buy a house and get a home loan until rates exceed 10 percent. Mortgage rates have not reached that high since 1989, Forbes reported.
In some cities, such as San Francisco and Seattle, rent prices have risen sharply in the last year, while mortgage rates have climbed at a much slower, affordable pace. This difference has decreased affordability for rental markets, while homeownership has remained a good option.
Some markets are likely to even out between buying and renting if mortgage rates reach between 5 and 6 percent. Economists predict that mortgage rates will climb to about 5 percent over the next year as the Federal Reserve continues to reduce its stimulus spending. That means that homebuyers may be able to find a low cost mortgage and purchase a home while they have the financial advantage.
Contact the Federal Savings Bank, a veteran owned bank, to explore affordable housing options.