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The Great Housing Debate: Buying vs Renting

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The great debate has always been whether it is more financially beneficial for consumers to rent or to purchase a home. With the tide in the market shifting and homeownership levels at 50 year lows, one could assume that changing financial considerations dictate that the average consumer would have a greater incentive to rent. But that is not necessarily the case according to a recent report from Trulia Chief Economist Ralph McLaughlin. In fact, the data shows that renting is less advantageous in most situations.

Trulia compared the total monthly costs of owning and renting, including mortgage payments, maintenance, insurance, and taxes. It also factored in one-time costs and proceeds, including closing costs, down payments, sale proceeds, and security deposits. Their study found that, on average, the long term financial benefit of purchasing a home significantly outweighs renting.

On a national basis, for households who move every seven years and can afford to put 20 percent down, today buying a home is 37.7 percent less expensive than renting. This is up slightly from the year prior, and across the 100 largest metros it ranges from over 50 percent to slightly under 20 percent. Nationally, prices have increased by 5.9 percent year-over-year in comparison to a growth of 3.5 percent for rents. But thanks to low mortgage rates keeping pressure on prices, say McLaughlin, buying a home today continues to be the best deal since 2012.

But there are some signs that could change the outlook. The Federal Reserve Bank could potentially increase interest rates later this year, but rates would need to increase drastically in order to push the rent vs. buy decision toward renting. Nationally and in 100 of the largest markets, rising home prices are more likely to have an impact on homebuyers’ bottom line than increasing rates.

Further, McLaughlin notes homebuyers should be more concerned about prices outpacing rents as the breaking point for rates is proportionally much higher than the breaking point for prices.

The top U.S. Metros where buying a home beats renting include: Miami, FL; West Palm Beach, FL; Houston, TX; Fort Lauderdale, FL; Charleston, SC; Baton Rouge, LA; New Orleans, LA; Syracuse, NY; Philadelphia, PA; and Columbia, SC.

Homebuyers in the West and Northeast have a more difficult time making this decision, though McLaughlin says it is still significantly less expensive to buy than rent across the board. In the top markets where the financial advantage of buying is slimmest, eight out of 10 markets are located in these regions.

These markets include: Honolulu, HI; San Jose, CA; Milwaukee, WI; Newark, NJ; San Francisco, CA; Madison, WI; Sacramento, CA; Fairfield County, CT; Oakland, CA; and Ventura County, CA. Despite the fact that these markets have the slimmest advantage for buying compared to renting, it is still at least 22 percent cheaper to buy a home than rent in each of these markets.