Buying a Home 44% Cheaper Than Renting, Despite Rising Prices


Editor's note: Jed Kolko is the chief economist for online listings site Trulia. This article originally appeared on the Trulia Trends blog.

Even though asking home prices rose 7 percent in the last year, outpacing rent increases of 3.2 percent, the gap between buying and renting has narrowed only slightly. One year ago, buying was 46 percent cheaper than renting. Today, it's 44 percent cheaper to buy versus rent. In fact, homeownership is cheaper than renting in all of America's 100 largest metros. That's because falling mortgage rates have kept buying almost as affordable, relative to renting, as it was last year. According to Freddie Mac, between February 2012 and February 2013 the 30-year fixed rate dropped from 3.9 percent to 3.5 percent, though rates have been rising in March.

To determine whether renting or buying a home costs less, we do the following:

1. Calculate the average rent and for-sale prices for an identical set of properties. For this report we looked at all the homes listed for sale and for rent on Trulia from December 2012 to February 2013. We estimate prices and rents for the similar homes in similar neighborhoods in order get a direct apples-to-apples comparison. We are NOT just comparing the average rent and average price of homes on the market, which would be misleading because rental and for-sale properties are very different: most importantly, for-sale homes are 47 percent bigger, on average, than rentals.

2. Calculate initial total monthly costs of owning and renting, including maintenance, insurance, and taxes.

3. Calculate future total monthly costs of owning and renting, taking into account price and rent appreciation as well as inflation.

4. Factor in one-time costs and proceeds, like closing costs, down payments, sales proceeds, and security deposits.

5. Calculate net present value to account for opportunity cost of money.

To compare the costs of owning and renting, we assume people will get a 3.5-percent mortgage rate, reside in the 25-percent tax bracket and itemize their federal tax deductions, and will stay in their home for seven years. We also assume buyers get a 30-year fixed-rate mortgage and put 20 percent down. Under all of these assumptions, buying is 44 percent cheaper than renting nationwide, taking into account all of the costs and proceeds from buying or renting over the entire seven-year period. We also look at alternative scenarios by changing the mortgage rate, the income tax bracket for tax deductions, and the number of years one stays in the home. Our interactive map shows how the math changes under alternative assumptions. And if you're interested, check out our detailed methodology which explains our entire approach, step by step.

Savings from Buying Versus Renting Is Smallest in California and New York, Biggest in the Midwest

Buying a home is cheaper than renting in all of the 100 largest metro areas, but buying ranges from 19 percent cheaper than renting in San Francisco to 70 percent cheaper than renting in Detroit. The financial benefit of buying instead of renting is narrowest in San Francisco, Honolulu, San Jose, and New York.

Over the past year, the gap between renting and buying has narrowed most in the Bay Area. One year ago, buying was 35 percent cheaper than renting in San Francisco and 38 percent cheaper than renting in San Jose; now, the difference is 19 percent and 24 percent, respectively. These metros have seen strong price increases year-over-year. In contrast, the gap didn't narrow at all in New York, where buying remains 26 percent cheaper than renting, both now and a year ago. On Long Island, the difference actually widened from 34 percent one year ago to 36 percent today. New York, Long Island, and other Northeastern metros have seen more modest price rebounds over the past year, despite rising rents:

Note:Negative numbers indicate that buying costs less than renting. For example, buying a home in San Francisco is 19 percent cheaper than renting in 2013. Trulia's rent vs. buy calculation assumes a 3.5 percent 30-year fixed-rate mortgage, 20 percent down, itemizing tax deductions at the 25 percent bracket, and 7 years in the home.

Read the rest of this post on Trulia Trends.

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Renting Vs. Buying a House
Renting Vs. Buying a House