November 25, 2014

Home Buying 38 Percent More Affordable Than Renting

Home Buying 38 Percent More Affordable Than Renting

Based on Trulia’s recent Rent Versus Buy Report, homeownership continues to be a cheaper option than renting with a traditional 30-year fixed rate mortgage in all the 100 largest metropolitan areas in the United States.

The report shows that buying a home is actually 38 percent cheaper than renting, which is slightly higher from last year’s rate of 35 percent. The baseline model comprises of a 20 percent down payment 30-year mortgage, 25 percent tax deductions, and the homeowner living there for seven years.

According to Trulia, there are two reasons with the widening gap. First, the 30-year fixed-rate mortgage rate has dropped from 4.8 percent to 4.3 percent in the past year. Second, rental prices have increased faster than home prices, excluding foreclosures. The combination of these trends makes home buying more affordable than renting.

The gap between the costs of buying a home and renting varies across the different metros since each market has their own prices and rents. Plus, property taxes and home price appreciation differ from place to place. Taking all these factors into consideration, buying ranges from 17% cheaper than renting in Honolulu to 63 percent more affordable than renting in Detroit.

Another interesting fact in Trulia’s report is that renting may be favorable in some markets next year if home prices continue to increase at a greater rate than rental prices, and if mortgage rates rise due to the strengthening economy, with the latter being expected by most economists.

Furthermore, nationally, home-buying rates would need to jump at 10.6 percent for renting to become more affordable that buying. However, such rate hasn’t been reached since 1989.

Generally speaking, buying a home remains to be a more sensible choice than renting since rental rates have inflated at a higher rate.

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