Is it cheaper to own than rent?
That’s typically the question at the top of the list when first-time buyers meet with a Realtor, and for the last several years the answer has been a definitive yes.
Then, as the economy started to recover from the Great Recession, pent up demand sent housing prices up as interest rates began to climb as well. All at once it seemed like the golden opportunity for first-time homebuyers to maximize their value had slipped away in hot summer selling season that saw the return of multiple offers.
However, even as the pendulum swung in favor of sellers for the first time since the housing bubble burst, renters were paying more as well. So Trulia developed a Rent vs. Buy calculator to help first-time homebuyers determine if it will be cheaper to buy than rent in 2014.
With the goal of helping savvy would-be first-time homebuyers understand the many economic factors that influence whether it is cheaper to buy or rent in their area, Trulia looked at items like how long they intend to stay in the home, their income tax bracket, mortgage down payment, term and interest rate, property taxes, closing costs or selling closing costs, rental and homeowners insurance and utilities.
According to Trulia’s sophisticated online calculator, buying would be cheaper than renting until the 30-year fixed rate reaches 10.5 percent, at today's prices and rents, based on national averages.
Trulia’s methodology compares the total cost of renting with the total cost of buying.
To calculate the cost of renting, they start with the monthly rent and add renter's insurance and a refundable security deposit. To calculate the cost of buying, they start with the purchase price and calculate the initial down payment and buyer closing costs - the monthly mortgage payment and other recurring costs like maintenance, property taxes, and insurance plus income tax deductions for mortgage interest and property taxes, the final mortgage payment, sales proceeds, and seller closing costs.
These costs depend on numerous assumptions, like your mortgage rate, your income tax rate, how long you stay in a home, and local home price appreciation.
To find out if it’s cheaper to rent or buy a home in your situation, try the local “Rent vs. Buy Calculator” on trulia.com. For example, in Lake County if you input $1,700 as the target monthly rent, $135,491 the target home price, 7 years for how long you would live there, 28 percent as your income tax rate and 4.33 percent as your mortgage rate (numbers automatically filled in by Trulia), the results are renting costs $1,601/month and buying costs $628/month – buying is 61 percent cheaper.
If your rent is nearly half that much - $900 the results are renting costs $847/month and buying costs $628/month – buying is 26% cheaper. For this scenario, buying would be cheaper than renting until the 30-year fixed rate reaches 8.4 percent.
With the Mortgage Bankers Association (MBA), the National Association of REALTORS®, Fannie Mae and Freddie Mac all projecting that mortgage rates will increase by approximately one full percentage over the next twelve months, it’s important for first-time buyers to also consider where home values are headed.
Published quarterly, Pulsenomics’ Home Price Expectation Survey averages the projections of future housing values from a nationwide panel of over one hundred economists, real estate experts and investment/market strategists. The latest results show home values will appreciate by 4.3 percent this year with a cumulative appreciation of 28 percent by 2018 (the most conservative quartile has cumulative appreciation over 16.8 percent by 2018).