Is it Better to Buy or Rent?

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By Pat Mertz Esswein

If you're uncertain where life might take you next -- for a job, a relationship or just a change of scenery -- renting beats buying. It costs a lot less in terms of time, effort and money to break a lease than to sell or rent out a home that you own. Plus, the landlord is responsible for maintenance and repairs.

Buying can be a great investment -- or a lousy one, depending on the market where you live when you buy and when you sell. If you buy and home values go down, you may have to wait to sell to get back the money you invested in a down payment and mortgage closing costs (see advice on what it takes to qualify for a mortgage).

It usually makes sense to buy only if you plan to stay in your home for five to seven years. That's generally long enough to recoup the upfront cost to get a mortgage and the back-end costs to sell and pay an agent's commission. If you fit that profile, now is a good time to buy; most cities in the U.S. have recovered from the housing market bust that began in mid 2006, and mortgage rates are still superlow. Once you become a homeowner and prices rise, you'll be rewarded with the power of leverage -- you may put only 20 percent (or less) down, but you get 100 percent of the appreciation. Regardless of whether your home's value goes up, you'll benefit from the tax deductions for mortgage interest and property taxes if you itemize deductions on your federal tax return. And you will probably be able to keep up to $250,000 of profit tax-free when you sell ($500,000 if you're married and file your income taxes jointly).

%VIRTUAL-article-sponsoredlinks%If you're on the fence about buying or renting, take a look at the price-to-rent ratio where you live (the median sale price of a home divided by the average annual rent for a comparable one). In general, if the ratio is less than 15, the market favors home buyers; if it's more than 20, it rewards renters. Right now, the ratio nationally is a balanced 14.8, according to Marcus & Millichap, a real estate research firm. Ratios between 15 and 20 can go either way, depending on factors such as taxes and the potential for appreciation. The ratios in such millennial meccas as New York City, San Francisco and Washington, D.C., typically favor renters, but a spike in rents and low mortgage rates is tipping the ratios in favor of buyers. (For a look at the largest 100 cities, see Trulia's Rent vs. Buy Map and use the calculator to assess your situation.)

Even with your down payment in hand, landing your dream home could be a challenge, especially in markets where the inventory of homes for sale is low (often the same markets where rents are inflated) and the best homes attract multiple bids. What you can do: Get preapproved for financing to make your bid more attractive. And ask the seller's agent if you can get the home inspected before you make an offer so you don't have to include it as a contingency in the contract.

House Rich: Neighborhoods With the Biggest Price Jumps
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Is it Better to Buy or Rent?

Year-over-year gain: 21.5%

Median sale price, Jan. 2013: $224,450

Median sale price, Jan. 2014: $272,750

Residents enjoy hundreds of nearby hiking trails, as well as indoor culture at the Fine Arts Center and the Colorado Springs Philharmonic.

Year-over-year gain: 22%

Median sale price, Jan. 2013: $318,375

Median sale price, Jan. 2014: $388,500

This neighborhood, bounded by the Schuylkill River and 20th Street, and by South Street and Christian Street, was viewed as a slum in the 1970s, when Philadelphia's Redevelopment Authority took over abandoned properties.

Year-over-year gain: 24.2%

Median sale price, Jan. 2013: $516,450

Median sale price, Jan. 2014: $641,500

Magnolia covers 4 square miles, making it the second-largest Seattle neighborhood by area. It features a lighthouse built in 1881 and is home to Seattle's largest park, at 534 acres.

Year-over-year gain: 32.1%

Median sale price, Jan. 2013: $210,446

Median sale price, Jan. 2014: $277,898

Paradise Valley, in the heart of the Scottsdale-Phoenix area, gets an average 294 days of sunshine a year -- hence, the more than 200 golf courses.

Year-over-year gain: 32.2%

Median sale price, Jan. 2013: $344,750

Median sale price, Jan. 2014: $455,835

The Washington Post listed Sunset Hills among "the shortest commute" category of Virginia neighborhoods, with an average commute time of just over 21 minutes. And Dulles International Airport is about six miles away.

Year-over-year gain: 44.5%

Median sale price, Jan. 2013: $247,735

Median sale price, Jan. 2014: $357,900

This once-seedy area has become hot in recent years. It's packed with art galleries and chic retail shops, as well as new upscale bars and restaurants next to venerable family-owned cafeterias.

Year-over-year gain: 46.9%

Median sale price, Jan. 2013: $284,750

Median sale price, Jan. 2014: $418,250

Brighton, once the center of New England's cattle trade, is in the northwest corner of Boston, on the Charles River. The Brighton Branch Library is Boston's first renovated LEED Green Building. The Brighton Police station is shown here.

Year-over-year gain: 47.5%

Median sale price, Jan. 2013: $223,175

Median sale price, Jan. 2014: $329,100

South Loop joins a number of other once-blighted neighborhoods on this list that have been redeveloped and are now hot. The site of former rail yards, it was known for many years more for its vices (as in brothels, burlesques) than its residential virtues.

Year-over-year gain: 48.7%

Median sale price, Jan. 2013: $241,000

Median sale price, Jan. 2014: $358,450

Also: Fairgrounds, San Jose (41.4%); La Jolla, San Diego (40%); Woodland Hills, Los Angeles (37.5%); Southwest Anaheim, Anaheim (35.2%); Berryessa, San Jose (34.4%).

Newhall, the southernmost and oldest district of Santa Clarita, was the first permanent Anglo settlement in the valley. Ranches-turned-film studios dot the area, including the Melody Ranch, which was once owned by Gene Autry. The ranch hosts the annual Santa Clarita Cowboy Festival.

Year-over-year gain: 48.8%

Median sale price, Jan. 2013: $504,250

Median sale price, Jan. 2014: $750,275

This is the most affluent neighborhood in Charlotte; the median income is $79,737, according to Zillow. That compares with a median of $46,975 for Charlotte. A high point of the area is the Duke Mansion, built in 1915 by tobacco magnate James Buchanan Duke.

Year-over-year gain: 57.4%

Median sale price, Jan. 2013: $167,450

Median sale price, Jan. 2014: $263,615

People who live here, according to classifications Zillow uses to characterize residents, are likely to be: Corporate Climbers, Multi-lingual Urbanites or in a category called "Bright Lights, Big City," which Zillow uses to describe "singles ranging in age from the early 20s to mid-40s who have moved to an urban setting."

Year-over-year gain: 97.3%

Median sale price, Jan. 2013: $668,250

Median sale price, Jan. 2014: $1,318,301

New York City’s 92-acre planned community includes areas built on more than 3 million cubic yards of soil and rock, some of which was excavated during the construction of the World Trade Center.

Bloomberg ranked neighborhoods in U.S. cities based on the year-over-year increase in median home sale prices from January 2013 to January 2014. Percentage increases were based on Zillow calculations of median sale prices of all home types and calculated only for neighborhoods with at least 10 sales per month. Only neighborhoods with median home sale prices of at least $250,000 in January 2014 were included. Data were rounded.

Related real estate rankings:

Most Expensive Home Prices: U.S. Neighborhoods

Priced Out: Where Higher Rates Could Hurt Homebuyers The Most

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