With the economy improving and still historically low mortgage rates, homeownership is regaining its edge over renting in America's 100 largest metropolitan areas, according to research conducted this summer by a real estate website. Favorable mortgage rates, tax deductions and time horizon affect the consumer's decision on whether to buy or rent in these metro areas.
The Summer 2012 Rent vs. Buy Report released by Trulia found with a 3.5 percent mortgage, itemized deductions at the 25 percent federal tax bracket, and a seven-year time horizon, homeownership is cheaper by a wide margin than renting in all of the 100 largest U.S. metros. However, relative affordability depends largely on location. Homeownership affordability is highest in Detroit and lowest in Honolulu and San Francisco.
"Despite the recent price rebound, rents continue to rise faster than prices, and mortgage rates are near record lows. Homeownership makes the most financial sense for people whose strong credit scores let them snag the lowest mortgage rate and who get the biggest benefit from deducting mortgage interest and property taxes from their income taxes," said Jed Kolko, Trulia's chief economist.
Looking at homes for sale and for rent on Trulia between June 1, 2012 and August 31, 2012, this study compares the average cost of renting and owning for all homes on the market in a metro area, factoring in all cost components, including transaction costs, taxes and opportunity costs. According to the study, buying a home is 24 percent cheaper than renting in Honolulu, 28 percent cheaper in San Francisco, and 31 percent cheaper in San Jose and New York, but is 70 percent cheaper in Detroit and 63 percent cheaper in places like Oklahoma City and Gary, IN.
In San Francisco, the actual dollar amount reveals that despite a low 28 percent difference in buying versus renting, the monthly dollar savings is big at $899 because rents and prices are so high in this region. In San Jose, despite a 31 percent difference in buying versus renting, the monthly dollar savings is pegged at $827.
Cost of homeownership assumes the home is sold after seven years and includes closing costs, maintenance, insurance, property taxes and other costs. Cost of renting includes security deposit and renters insurance. Monthly costs are based on net present value of costs averaged over seven years, and based on the average across all properties listed in the metro area, including those for sale and those for rent, in summer 2012.
The study states if the above assumptions change, so does the equation. For prospective homeowners who are unable to secure the best mortgage rates, fail to itemize their tax deductions, or plan to stay in their next home fewer than seven years, the cost of homeownership relative to renting will be greater. Kolko explains in the real estate website's blog that with a 4.5 percent mortgage, not itemizing and staying only five years, buying becomes more expensive than renting in Honolulu (by 13 percent), San Francisco (by 10 percent), and San Jose (by 4 percent).
"Buying a home makes sense in many situations, especially in light of rising rents," said Suzanne Yost, president of the Silicon Valley Association of Realtors. "With the economy slowly improving, there is much optimism that home values will continue to increase."
A third quarter 2012 home values survey just released by HomeGain disclosed 80 percent of real estate professionals and 62 percent of homeowners believe home values will increase in the next two years. Top five states where agents and homeowners see home values increasing are Colorado, California, Virginia, Maryland and Washington.
The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.
The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.
Variations of this article have appeared in local area newspapers.
For further information, please contact Rose Meily at SILVAR Public Affairs, email , or phone (408) 200-0109.