Buyers are most usually stunned at the number of potentially life-changing decisions required to make over the course of a house hunt. Things like which neighborhood to begin looking, condo or single family, fixer or move-in ready, how much and when to offer, and when or should you remove contingencies? And that’s just the short list.
But before those decisions can even be pursued a thorough look at the bottom line impact to your budget is well advised. It’s one of the most basic decisions but also the most impactful. Should you rent or buy? Would-be buyers understand that many economic factors influence whether it is cheaper to rent or to buy. When considering this question first determine these often overlooked items: how long you intend to stay in the home; your income tax bracket; mortgage down payment, term and interest rate; property taxes; closing costs or selling closing costs
A simple rent vs own calculation can make these factors incredibly simplified. Keep in mind that even though these factors seem rudimentary, slight changes in any one can significantly affect the overall bottom line.
Chief Economist Jed Kolko offers some help in understanding the basic myths that shroud the rent vs. buy cost factors.
1. Myth: Rising home prices and mortgage rates make it more expensive to buy than to rent.
Fact: Homeownership 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 percent, compared with 3.75 percent one year ago. This jump in rates has raised the cost of buying relative to renting. As a result, buying is 35 percent cheaper than renting today, versus being 45 percent cheaper than renting one year ago.
2. Myth: The mortgage interest deduction is the only reason home ownership is more affordable than renting.
Fact: A key factor affecting the rent-versus-buy math is whether you itemize deductions on your income taxes and what tax bracket you’re in. If you itemize, you can deduct mortgage interest and property tax payments from your income before calculating how much you owe in taxes. That said, only 33 percent of tax filers choose to itemize. Itemizing lowers the cost of buying relative to renting — especially if you pay taxes at a higher rate, because that means you’re deducting more. But buying remains cheaper than renting almost everywhere even if you don’t itemize. Without itemizing buying still beats renting in 97 of the 100 largest metros – everywhere but San Jose, San Francisco, and Honolulu, even without assuming that the buyer will itemize their taxes and use the mortgage interest deduction.
3. Myth: The increase in home prices will be the tipping point in making renting a home cheaper than buying, in most areas.
Fact: Actually, the biggest factor narrowing the gap between the cost of buying and the cost of renting is rising mortgage rates – which affect the entire country. In fact, the benefit of buying relative to renting shrank in nearly all of the 100 largest metros over the past year.
Nationally, rising mortgage rates account for about 8 points of the 10-point shift from buying being 45 percent cheaper than renting one year ago to being 35% cheaper now. The other 2 points are due to prices rising faster than rents.
Because fluctuating mortgage rates can affect the rent versus buy math, we identified the mortgage rate “tipping point” at which renting becomes cheaper than buying, given current prices and rents. If rates keep rising, San Jose will tip first in favor of renting, at 5.2 percent. Already today, at 4.8 percent, buying is just 4 percent cheaper than renting in San Jose. Nationally, the mortgage rate tipping point is 10.5 percent.
When taking the step to purchase a home always begin by consulting a Realtor. Realtors can help guide you through the life changing decisions encompassing a home purchase.
Sheri Aguilar is the president of the Lodi Association of Realtors and can be reached at Sheri@YourLocalAOR.com