By Les Christie August 16, 2011: 6:07 AM ET
NEW
YORK (CNNMoney) -- Home prices have taken such a beating and demand for
rental units has increased so much that it's now cheaper to buy a two-bedroomhome than to rent one in most major U.S. cities.
According
to real estate web site Trulia, buying was cheaper than renting in 74% of the
country's 50 largest cities in July. In just 12% of the cities, including New
York, Seattle and San Francisco, renting was cheaper. In the remaining 14% of
cities, renting was less expensive but close to the cost of buying.
In
addition to a continuing decline in home prices, rock-bottom
interest rates have added a lot of
weight to the buy side of the scale. The overnight average rate for a 30-yearfixed was just 4.19% on Monday, according to Bankrate.com. A 15-year fixed
averaged just 3.43%.
Add
in the tax perks of home ownership and for those who can afford it (and who can
actually qualify for a loan), it certainly is a buyer's market.
"It's
a personal decision, of course. But if you have a steady job and you are
planning to stay for seven years or more and have enough cash to put 20% down
and enough left over for seven or eight months of expenses, you're better off buying in most places," said Daisy Kong, a spokeswoman for Trulia.
Top buyer's markets
Las
Vegas offered the most
compelling buy-side math, Trulia's survey found.
Prices
there have plunged more than 59% from their August 2006 peak, according to the S&P/Case-Shiller
home price index.
The
median price of a two-bedroom, two-bath condo or townhouse is about $60,000,
according to Trulia, a ratio of only six times the median annual rent of a
similar rental apartment, which is $9,700.
Monthly mortgage payments on a median-priced Vegas condo would come to only $256 on a
30-year, 5% interest loan. Even factoring in property taxes and common charges of
roughly $300 a month, the monthly amount is still much lower than the $810 in
monthly rent they would pay on a similar place.
Detroit, according to Trulia, is another metro area
where buying is better. The median price for a condo or townhouse is about
seven times annual rent. Home prices in Mesa,
Ariz. and Fresno,
Calif. also clock in at
seven times rent.
Arlington,
Texas, Sacramento,
Calif., Phoenix and Jacksonville,
Fla. all had buy-rent
ratios of eight, Trulia said.
Top renter's markets
Even
though rents average $2,980 a month in New
York (the highest of any
of the 50 markets), it's still the best city for renters, according to Trulia's
survey.
Paying
for the same kind of two-bedroom Manhattan apartment would cost 36 times as
much, nearly $1.3 million.
One
surprising place where renting is cheaper is Ft.
Worth, Texas; buying exceeds renting costs by 32 times. Part of the reason is there are relatively few
condos in the city and they tend to be upscale and costly. That, combined with
low rents of about $9,500 a year, make renting cheaper.
Omaha,
Neb., where buying is 27
times annual rents, Seattle and San
Francisco, which both clock in
with purchase prices that are 24 times rents, and Kansas
City, at 22 times rents,
are other places where renting makes financial sense.
Should you rent or buy?
The
buy-rent calculation is just one part of the decision-making process. Other
factors include:
· How
long you plan to stay.
If you're not keeping the home for several years, transactional costs of buying
and selling (e.g; commissions, closing costs) can wipe out any buying edge.
· Whether
you have cash for closing.
It's not easy to find banks willing to lend more than 80% of the cost of a
home. That means buyers have to come up with 20% down, plus closing costs. On a
$200,000 home, that's $40,000.
· Whether
you can cover all the homeownership costs. It's not just the mortgage: There are property taxes,
insurance, heat, utilities and regular maintenance.
· Whether
you can claim the tax advantages of homeownership. Mortgage interest is deductible and can shave
a lot off tax bills but this benefit accrues mostly to high income earners with
substantial mortgage payments. Many borrowers claim the standard deduction on
their taxes and so derive no savings from the deduction.
Even
where it's cheaper to rent, it doesn't necessarily mean renters will come out
ahead, according to Ken Johnson, a real estate professor at Florida
International University and co-author of a new study on whether it's better to
buy
or rent.
"Paying
off a mortgage is a kind of forced savings," he said. Each check
homeowners write lowers the balance they owe and increases the value of their
property holdings. That, unlike cash in a bank account, is not easy to tap.
Homeowners
have to go through a lengthy and costly process to access it by taking out a
home equity loan or a cash-out refinance -- actions they tend not to take
unless there's a specific need.
Depending
on where they live, renters may save on monthly expenses but, unlike the forced
savings of mortgage payments, they won't have anything to show for their
monthly payments in the way of savings.
Ultimately,
however, the decision whether to buy or rent depends on each person's situation
and their plans for the future.
While
buying a home may be an attractively cheap option these days, many mortgage
holders have found out the hard way that the joys of homeownership can turn
sour should the unexpected strike.
Horizon Properties Inc. is Guam’s leading real estate services provider and property management company. We work diligently to fulfill the requirements of buyers and renters, while working towards a smooth, hassle-free transaction for sellers. Our innovative and “customer first” approach towards property management results in outstanding property care and profitability.
