A new report from Trulia shows the gap between renting and buying home is becoming smaller, but in spite of this owning your own home is still 38% cheaper than renting due to interest rates being 4.5%. It’s expected that buying a property will remain the cheaper option until interest rates rise to 10.6%.
The article in Propertywire does point out that there are variations in local markets, giving the example that buying is just 5% cheaper than renting a property in Honolulu, while it’s 66% cheaper to buy than rent in Detroit. Even when specific markets are taken into account, the costs still depends on whether or not house prices increase or drop after purchase.
The report shows that property prices have increased substantially in numerous markets over the past 12 months, but low mortgage rates have kept home ownership affordable. In some markets, particularly Seattle and San Francisco the cost of renting has sharply increased, and these rent increases make purchasing property look more affordable in comparison.
It’s possible that certain markets may see the balance between renting and buying tip in favor of renting later on in the year, if prices continue to rise more quickly than rents, and if as anticipated interest rates increase. The report in Trulia has identified the tipping point at which point it becomes cheaper to rent than buy, as for example the tipping point for San Francisco would be before interest rates increase to reach 6%, but nationally interest rates would need to rise to 10.6%, a level not seen since 1989.
Experts point out that even though property prices rebounded last year, buying is still cheaper than renting in most of the country due to mortgage rates being near to historic lows. This is even true for expensive markets such as San Francisco where property prices are high in relation to income, provided people are prepared to stay in the property for seven years.
However it’s always difficult to predict what will happen to property prices in the future, and the recent price gains could lead people to expect for similar gains in the future. This is a trap that many people fell into during the last housing bubble, and considering house prices rose by 11.4% last year it would be all too easy for new buyers to follow the same path. Even a small price drop can have quite an effect on the future sales price of a property.