With rental rates rising dramatically in many U.S. markets, those considering a move should take a fresh look at the rent-versus-buy equation. Consider this: Nationwide, the average U.S. rent has spiked 20 percent from 2010 through Q2 2016, according to research firm Reis. During that time, the average inflation rate was just 1.43 percent. Rental prices are also outpacing wage growth. No doubt, those moving have to weigh the pros and cons of putting down roots through a home purchase versus making a short-term rental commitment, but today's market factors make a compelling argument to purchase. Even people who once felt forced out of the housing market are taking a fresh look at homeownership.
Homeowners should keep in mind the following factors when considering a move.
Crunching the Numbers
In working with homeowners as they mull over their purchase or rental options in their new location, it's helpful to put context around the basic financials. For instance, people spend a higher percentage of their income on rent than on mortgage payments and property taxes. In all 100 of the top metro markets, buying is currently 35 percent cheaper than renting.
If an employer offers home purchase benefits to help with mortgage assistance, the financial equation makes it even more enticing to purchase. Add in low interest rates, the predictability of a fixed mortgage, and possible tax deductions and homeownership could be the right short- and long-term choice. If mortgage rates drop again, homeowners can also refinance. They can further build substantial equity, which can contribute to financial stability and a more comfortable retirement.
Those considering a more permanent move should keep in mind that the “breakeven” time in many markets has gotten shorter due to those rising rental rates. The breakeven point is based on how much a home's purchase price will need to appreciate on an annual basis relative to renting in order to cover the costs of owning the home.
Those costs include the down payment, closing costs, property taxes and maintenance, among others. Once the breakeven threshold is reached, buying becomes more advantageous than renting. Nationwide, data shows that buyers break even in just a year and eight months, outdoing renters by gaining equity from their mortgage payments. So, even those planning to spend just a few years in that market may benefit from purchasing a home rather than choosing a rental.
In the 10 hottest real estate markets, homes come on and off the market in a matter of days or weeks. The median age of inventory in three San Francisco-area markets ranges from 33-51 days. The inventory in most of the top 10 markets moved more quickly in August of 2016 than just a month earlier.
With this fast-paced market, buyers need to be ready to make an offer and get a mortgage quickly. If a move has come up suddenly, borrowers may not have had time to save enough for a traditional 20 percent down payment. They may also have a special requirement, such as the need for a multi-million-dollar mortgage.
When homeowners are navigating their financing options, working with a lender that will explain the nuanced ins and outs of a move is essential. Mortgage lenders often provide a range of down payment options, including low or no down payment costs; provide information about different types of mortgages, such as VA and FHA loans; outline what's required for the preapproval process; and can discuss fixed and adjustable-rate options.
The New Reality of Rent v. Buy
The percentage of Americans who own their homes is at a record low. At the same time, rental costs are high and getting higher, often outstripping the rise in home prices. In today's market, homeownership may offer benefits that can't be matched by renting, from lower costs to stability and equity. With the changes underway in today's markets, it's time to revisit the rent versus buy equation.