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Is The Financial Benefit of Homeownership Shrinking?

House for rent

House for rentHomeownership makes good financial sense—at least in a lot of cases. However, the recent relentless rise of home prices and flat or falling rents is beginning to threaten the financial benefits of owning in some markets, according to Trulia [1].

Comparing the cost of renting versus owning in the 100 largest U.S. metros, Trulia found the savings for owners is shrinking in every market. That said, only two markets have crossed the line to where renting actually makes more financial sense than owning.

“For as long as we have run this report [2], renting has never been a better deal than buying,” wrote Cheryl Young, Senior Economist on Trulia.com. “But this summer, driven by epic home price appreciation and lifeless rents, renting tips the scales over buying in San Jose and San Francisco.”

In San Jose, home values have skyrocketed, increasing 29 percent over the year while rents remained stable. In San Francisco, home values climbed 14.2 percent over the year while rents declined 3.0 percent, according to Trulia.

Young was insistent that “The ultra-costly San Francisco Bay Area is not a harbinger for the nation as a whole.”

“While renting may outweigh buying in San Jose and San Francisco, it is unlikely that renting will tip the scales nationally anytime soon,” she said.

Still, the gap in the financial benefit of renting versus owning is closing across the nation and has fallen to an all-time low since Trulia began tracking it five years ago. Today, owning a home is about 26.3 percent cheaper than renting at the national level. A year ago it was 35.7 percent cheaper.

This decline in homeowner savings occurred as national home prices rose 8.1 percent and rents fell 1.1 percent, according to Trulia. In addition to rising home prices and declining rent prices, rising mortgage rates have contributed to the decline in the financial benefit of owning, Trulia noted.

While San Jose and San Francisco were the only two major metros where renting now makes more financial sense than buying, the markets with the smallest savings for homeowners included, Honolulu, Hawaii, where homeowners save 2.0 percent; Seattle, Washington, where homeowners save 10.0 percent; and Portland Oregon, where homeowners save 13.8 percent.

Rounding out the list of the 10 major metros with the smallest financial gap between owning and renting was Madison, Wisconsin; Milwaukee, Wisconsin; Sacramento, California; Oakland, California; and Las Vegas, Nevada.

Interestingly, home prices in Detroit rose 18.3 percent over the past year, trailing only San Jose; yet owning still makes more financial sense than renting in the city. In fact, Detroit homeowners come out ahead of homeowners in any other major metro when it comes to renting versus owning. Homeowners here save 48.9 percent.

Baton Rouge, Louisiana homeowners save 47.6 percent compared to renters in the metro. Other metros where homeowners save the most are Columbia, South Carolina; New Orleans, Louisiana; and West Palm Beach, Florida.

For its comparison, Trulia assumed homeowners put down a 20 percent down payment; obtained a 30-year, fixed rate mortgage loan; and owned their homes for seven years.