Buy vs. Rent: Now Buying Is Cheaper in Big Cities

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It may now be cheaper to buy than rentCredit Suisse is putting numbers to something we already suspect: The gap between the cost of owning and renting an apartment has halved in the past two years. In some locations, it's even cheaper to rent an apartment than to own.

In a research report, the firm says the percentage of median household income needed to pay the mortgage on a median-priced home is at a 30-year low, thanks to record low mortgage rates and cheap home prices. It singles out Washington, D.C., California's Inland Empire, Las Vegas and Phoenix as areas where it's cheaper to own than rent.
Backing up their math with legwork, the analysts compared two similar apartments in Stamford, Conn., and found that it's only 16 percent more expensive to own than rent with a 30-year fixed-rate mortgage; compared to a 43 percent difference in 2007. In San Francisco, they found it was actually 1.7 percent cheaper to own a condo than to rent.

This research jibes with work from others. Last month, real estate website Trulia.com launched a buy vs. rent index, which showed it's cheaper to buy in obvious cities such as Phoenix and Las Vegas, but also in less obvious ones such as Minneapolis and Arlington, Texas.

The problem with the analysis, however, is that it usually doesn't take into account the long-term costs of owning a home.

Think of all the money you have to spend on upkeep, for example. Then there's opportunity cost: the financial gains you're giving up by sinking your money into interest payments. Housing bulls argue that real estate offers great returns, but it's not quite true. Home prices historically gain just 1 to 2 percentage points over inflation, according to the National Association of Realtors, while the S&P stock index, after inflation, has almost doubled over the past 50 years, according to data from Yale economist Robert Shiller.

Home ownership also carries other hazards, as a Federal Reserve real estate analyst recently told a conference, as reported by The Wall Street Journal. As an investment, it's undiversified: you probably wouldn't think it's a great deal if someone suggested you put most of your savings into a bond issued by your condo board, right? And, it's tightly correlated to the job market, which means that you're likely to lose your job and value in your home at the same time.

Most economists would agree with the basic math, but they argue that the details vary greatly from case to case. It's not quite so black-and-white, economist Joel Naroff told AOL HousingWatch.

"Housing was never as lucrative an investment as people thought, except for people who lived in areas where prices did rise significantly," he says. "Because we went through a couple of housing bubbles, people started looking at their homes as an investment rather than as a place to slowly build wealth."

The biggest financial advantage that you get from buying a home, he explains, is leverage: You get to put $20,000 down on a home that's really worth $100,000, and as you slowly build equity you're taking advantage of appreciation in an asset that you wouldn't otherwise have been able to afford.

In other words, nobody's going to lend you $80 to buy $100 in Apple stock and only charge you 6 percent for the privilege.

Looking at it that way, this might be a good time to buy a home, after all.


More on AOL Real Estate:
Find out how to calculate mortgage payments.
Find homes for sale in your area.
See apartments for rent in your area.
Looking for a new home? See "Should You Rent or Buy?"



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