Paying Rent? It May be Time to Take the Plunge

To rent or to buy? For millions of americans, that is the question. The recent housing boom and subsequent bust has some potential buyers hesitating. But the fact is, with interest rates at record lows, home prices where they were a decade ago and values expected to begin creeping back up over the next year, renters have a golden – and limited – window of opportunity to own a home for little more than it costs to rent one.

So, what’s the problem? Many first-time buyers who, under other circumstances would now be entering the market, have been spooked by unprecedented economic conditions and scare headlines. The fact is, over the long haul, an investment in a new home is expected to remain the primary way in which most Americans will build wealth.

“Many Americans are questioning if home ownership is an inherent element of their dream,” says Tara-Nicholle Nelson, real estate consumer advocate for real estate website Trulia. “Part of that dream is based on economic common sense. Besides stability and status, owning a home can help build equity, improve credit ratings and be a tax deduction.”

In some markets, however, people are better off renting – at least for now. That’s because in these
areas, the cost of buying a new home is still prohibitive, especially given tighter lending standards.

THE PRICE-TO-RENT RATIO
There are several ways to determine whether buying is a better deal than renting. Trulia came up with a methodology in which its researchers determine the price-to-rent ratio in major markets, comparing the annual cost to rent an average two-bedroom apartment, townhome or condominium and comparing that number to listing price of comparable units for sale. The company’s conclusions:

If the price-to-rent ratio is between 1 and 15 – that is, if the price to buy is only 1 to 15 times prevailing annual rents – it’s much less expensive to own than to rent.

If the ratio is between 16 and 20, owning a home may be slightly more expensive than renting, but buying probably still makes financial sense, depending on your individual situation. If the ratio is higher than 21, then under most circumstances total cost of owning a home is much greater than the cost of renting.

With a price-to-rent ratio of 33, New York City, not surprisingly, is highest on the list. The average cost to rent a two-bedroom unit is $3,537 per month, or $42,444 per year. To buy a comparable unit is $1,383,612. The ratio is derived by dividing $1,383,612 by $42,444.

The next highest city, oddly enough, is Omaha, which came in with a price-to-rent ratio of 26. The average cost to rent a two-bedroom unit there is $870 per month, or $10,440 per year. To buy a comparable unit would cost $275,844. At the opposite end of the spectrum, with a price-to-rent ratio of 8, is Minneapolis, where a two-bedroom unit rents for $1,699 per month, or $20,388 per year, and sells for $153,843.

THE TAMPA MARKET
Though Trulia didn’t assess the Tampa market, Florida Homebuyer West Coast applied the same methodology using the most current data available. The median price of a home at presstime was $138,074 and the average rent was $743. That’s a ratio of roughly 18, which means that buying could potentially be less expensive than renting, depending upon the property.

Another way to look at Tampa’s situation is to compare a monthly mortgage payment for the typical home versus the monthly rent payment. Assuming 10 percent down and an interest rate of 5.07 percent – at presstime interest rates were actually lower than that – it costs $899 per month to buy that $138,074 home.

Renting a comparable home would cost $743 per month. So, the monthly payment for buying is only $156 higher than the monthly payment for renting – and by buying, you’re getting the benefit of tax breaks while building equity.

That gap is narrowing locally and across the country. Indeed, the gap between monthly rents and mortgage
payments is at its lowest level in almost 20 years, according to a national study conducted for The Associated Press by Marcus & Millichap Real Estate Investment Services.

The study, part of a week-long look at homeownership by the AP, found years of falling home prices and low interest rates have created the ultimate buyer’s market. “Statistically, it’s a great time to buy,” said Hessam Nadji, managing director of Marcus & Millichap. “Psychologically, the consumer doesn’t feel like it’s a great time to buy.”

The analysis of 45 metro areas found the difference between the monthly mortgage payment on a median-priced home and the median rent is down to $256. The last time that gap was anywhere near that small was in 1993 when it fell to $264, according to the study.

In Detroit, which has been hard hit by unemployment and falling home values, it’s cheaper to rent than own, though not by much – about $75. The difference is less than $200 a month in markets such as Las Vegas, Atlanta, Cleveland, Indianapolis, Orlando – and Tampa.

A LEVERAGED
INVESTMENT
But there’s more to consider than just the monthly payment. There are also significant tax benefits, including capital gains deductions for property taxes and loan interest. A home appreciates in the long run and acts as a hedge against inflation. It helps diversify your assets, builds equity and provides a means of forced savings as you slowly pay down the principal.

Real estate also is a leveraged investment, unlike most others. If you put 10 percent or $20,000 down on a $200,000 house and it appreciates to $300,000, that translates to a 500 percent return. Put another way, no one is going to lend you $20,000 to buy $100,000 worth of stock in Microsoft—and only charge you 4.5 percent for the privilege.

Granted, homes have lost value over the past several years. But the losses are versus artificially inflated boomtime highs. Now that home prices have come back down to earth, most experts believe appreciation is set to resume.

BUYING VERSUS RENTING:
LOOK AT THESE FACTORS BEFORE YOU MAKE A SUDDEN MOVE, TAKE TIME TO EVALUATE YOUR CURRENT SITUATION. HERE ARE FIVE FACTORS TO KEEP IN MIND AS YOU CONSIDER TODAY’S RENT VS. BUY DILEMMA.

  Interest Rates. As of August, interest rates on a 30-year, fixed-rate mortgage had plummeted to record low of 4.5 percent. When interest rates are low, you can get more home for your money – not to mention a lower monthly mortgage payment.

 Your Financial Situation. If you’ve saved money and can afford to put a 5-20 percent down payment on a home, it’s pretty much a no-brainer: now is the time to buy. Not only can you get more bang for your buck but buying a home is generally a smart long-term investment that offers valuable tax advantages.

  Where You Live. In most markets, the gap between the average monthly mortgage payment and the average monthly rental payment is shrinking. In Tampa, the gap is just barely above $150, and that’s not taking tax breaks into account.

  How Long You Plan to Stay. If you plan to stay put for a while, buying makes sense. The longer you plan to stay, the more equity you’ll build. If you’re one of those carefree types who spontaneously decides to move every couple of years, then buying a home probably isn’t a wise decision.