You can save hundreds of dollars a month by
buying a home instead of renting – especially if you can get today’s low
mortgage rates, itemize your tax deductions and plan to live there for 7
years.
The most important housing decision that most consumers face is whether to rent or to buy. So to help them with this decision, we took a look at the key market factors affecting the cost of homeownership. First off, asking home prices have started to rebound and have risen by 2.3%
year over year in August (3.8% excluding foreclosures); however, rents
have risen more (4.7%). This means that prices are lower relative to
rents than they were a year ago. But more importantly, mortgage rates
have fallen: the best rates this summer have been around 3.5%, while
last summer rates were closer to 4.5%. Based on asking prices and rents
during the summer of 2012, buying is now 45% cheaper than renting in the
100 largest U.S. metros, on average – that’s a savings of $771 a month.
If you plan to stay in a home for 7 years, which is the average time that Americans traditionally live in a home before moving again, it is more affordable to buy than to rent in ALL of the 100 largest metros in the U.S.
Costs aside, the decision to rent or buy a home is very personal.
There’s a strong emotional component: some people want the security of
homeownership and others want the footloose freedom of renting. But the
financial factors are also very personal because the decision to rent or
buy depends on:
- Can you qualify for a mortgage at the best rate available?
- Which tax bracket are you in, and do you itemize your deductions?
- How long will you stay in your home?
To calculate whether renting or buying costs less, we assume people can get a low mortgage rate
of 3.5%, itemize their federal tax deductions and are in the 25% tax
bracket, and will stay in their home for seven years. (Below, we’ll show
how changing these assumptions can affect the rent-versus-buy math.) We
do the following calculations:
- First, we looked at all the homes for sale and rentals listed on Trulia in June, July and August 2012. On for-sale homes, we took the asking price and estimated what it would rent for; for rentals, we took the asking rent and estimated what it would sell for. That way, we can calculate the average rent and asking price for an identical set of properties in a metro area, for a direct apples-to-apples comparison. By looking at homes currently for sale or rent, we’re able to illustrate the actual housing options that consumers face right now.
- Second, we estimated the total costs of renting and buying for the typical property in a metro over a seven-year period. We factored in all the costs of homeownership (e.g., closing costs, maintenance, insurance, taxes, etc.), along with the tax benefit of deducting mortgage interest and property taxes, as well as the proceeds from selling the home after seven years with modest home price appreciation. On the rental side, we factored in renters’ insurance and the security deposit. Finally, we calculate the net-present-value of all those costs to capture the opportunity cost of tying your money up in a down payment. This gives us the total cost of buying versus renting. We then calculated the dollar difference and percentage difference between renting and buying.
- Finally, we looked at alternative scenarios of the costs of renting versus buying, by changing the mortgage rate, the income tax bracket for tax deductions, and the time horizon.
Where Buying is a Slam Dunk
With a 20% down payment, a 30-year fixed mortgage rate at 3.5% and at the 25% federal tax bracket, homeownership is cheaper than renting in all of the 100 largest metros by a wide margin. There is no market where the financial decision is even close, so long as you plan to stay in the home for at least seven years, get 3.5% mortgage, and itemize your tax deductions. However, how much cheaper it is to buy a home than to rent really depends a LOT on where you live.
With a 20% down payment, a 30-year fixed mortgage rate at 3.5% and at the 25% federal tax bracket, homeownership is cheaper than renting in all of the 100 largest metros by a wide margin. There is no market where the financial decision is even close, so long as you plan to stay in the home for at least seven years, get 3.5% mortgage, and itemize your tax deductions. However, how much cheaper it is to buy a home than to rent really depends a LOT on where you live.
Buying is 24% cheaper than renting in Honolulu, 28% cheaper in San
Francisco, and 31% cheaper in New York. On the other end of the
spectrum, homeownership is extremely affordable in Detroit, where buying
a home is 70% cheaper to buy than to rent, and 63% cheaper in both
Oklahoma City and Gary IN. Check out the top 10 lists below to see where
the cost differences between buying and renting are smallest and
largest.
| Where the Financial Advantage of Buying Over Renting is Smallest | ||||
| U.S. Metro | Monthly cost of home ownership ($) | Monthly cost of renting ($) | Difference ($) | Difference (%) |
| Honolulu, HI |
$1,519
|
$2,007
|
-$488
|
-24%
|
| San Francisco, CA |
$2,327
|
$3,226
|
-$899
|
-28%
|
| New York, NY-NJ |
$1,857
|
$2,687
|
-$831
|
-31%
|
| San Jose, CA |
$1,819
|
$2,646
|
-$827
|
-31%
|
| Los Angeles, CA |
$1,379
|
$2,020
|
-$641
|
-32%
|
| Ventura County, CA |
$1,516
|
$2,274
|
-$759
|
-33%
|
| Orange County, CA |
$1,610
|
$2,423
|
-$813
|
-34%
|
| San Diego, CA |
$1,314
|
$1,981
|
-$667
|
-34%
|
| Albany, NY |
$999
|
$1,535
|
-$536
|
-35%
|
| Long Island, NY |
$1,603
|
$2,513
|
-$910
|
-36%
|
Note: Cost of homeownership assumes that the home is sold after 7
years and includes closing costs, maintenance, insurance, property
taxes and other costs. Cost of renting includes security deposit and
renters insurance. Monthly cost is based on net present value of costs
over 7 years. Monthly costs are based on the average across all
properties listed in the metro area, including those for sale and those
for rent, in summer 2012.
| Where the Financial Advantage of Buying Over Renting is Huge | ||||
| U.S. Metro | Monthly cost of home ownership ($) | Monthly cost of renting ($) | Difference ($) | Difference (%) |
| Detroit, MI |
$349
|
$1,149
|
-$800
|
-70%
|
| Gary, IN |
$616
|
$1,649
|
-$1,033
|
-63%
|
| Oklahoma City, OK |
$590
|
$1,576
|
-$987
|
-63%
|
| Lakeland-Winter Haven, FL |
$495
|
$1,276
|
-$781
|
-61%
|
| Toledo, OH |
$476
|
$1,222
|
-$746
|
-61%
|
| Dayton, OH |
$524
|
$1,332
|
-$808
|
-61%
|
| Warren-Troy- Farmington Hills, MI |
$588
|
$1,494
|
-$907
|
-61%
|
| Memphis, TN-MS-AR |
$548
|
$1,389
|
-$841
|
-61%
|
| Cleveland, OH |
$585
|
$1,464
|
-$879
|
-60%
|
| West Palm Beach, FL |
$723
|
$1,764
|
-$1,041
|
-59%
|
Note: Cost of homeownership assumes that the home is sold after 7
years and includes closing costs, maintenance, insurance, property
taxes and other costs. Cost of renting includes security deposit and
renters insurance. Monthly cost is based on net present value of costs
over 7 years. Monthly costs are based on the average across all
properties listed in the metro area, including those for sale and those
for rent, in summer 2012.
What does this mean in dollars? Buying is cheaper than renting by
several hundred dollars a month in every large metro. The charts above
show how the percent difference in buying versus renting may be smaller
in San Francisco (-28%) than in almost all other metros, but the annual
dollar savings is big ($899) because the rents and home prices there are
so high – so even a smaller percentage difference means a big dollar
difference. (Remember that we’re looking at the annual cost of buying or
renting the typical listed home. Most homes listed are for-sale, and for-sale homes tend to be much larger than rentals, on average. That’s why the monthly cost of renting the typical home is higher than the actual amount most renters pay.)
