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Buying a Home still cheaper than Renting

Sacramento
Amarveer Dhillon

Sep. 25, 2013

Homeownership Still remains cheaper than renting nationally and in all of the 100 largest metro areas. But rising mortgage rates have narrowed the gap between the cost of buying and the cost of renting. The 30-year fixed rate is now 4.80%, compared with 3.75% one year ago (according to the Mortgage Bankers Association, or MBA). This jump in rates has raised the cost of buying relative to renting. As a result, buying is 35% cheaper than renting today, versus being 45% cheaper than renting one year ago.

How can buying be so much cheaper than renting when home prices and mortgage rates are both climbing? The key reason: both rates and prices are rising from very low levels and are still below their long-term historical norms. But the rent versus buy math depends on your local market, as rising rates and prices have pushed a handful of metros very close to the tipping point when renting becomes cheaper.

(This also applies to Property Investment in over 100 metro areas, including Greater Sacramento and other surrounding areas)

See Below how to calculate whether renting or buying a home costs less.

:Before going further into the data, here’s how to do the math. To calculate whether renting or buying a home costs less, we take the following steps

  1. 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 June to August 2013. We estimate prices and rents for similar homes in similar neighborhoods in order get a direct apples-to-apples comparison. We are NOT just comparing the average rent and average price of homes on the market, which would be misleading because rental and for-sale properties are very different: most importantly, for-sale homes are roughly 50% bigger, on average, than rentals.
  2. Calculate the initial total monthly costs of owning and renting, including maintenance, insurance, and taxes.
  3. Calculate the future total monthly costs of owning and renting, taking into account price and rent appreciation as well as inflation.
  4. Factor in one-time costs and proceeds, like closing costs, downpayment, sales proceeds, and security deposits.
  5. Calculate the net present value to account for opportunity cost of money.

To compare the costs of owning and renting, we assume people get a 4.8% 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 35% cheaper than renting nationwide, taking into account all of the costs and proceeds from buying or renting over the entire seven-year period. We also look at alternative scenarios by changing the mortgage rate, the income tax bracket for tax deductions, and the number of years that one stays in the home.