*Renting Vs. Buying*
**By Lew Sichelman**
***Rising mortgage rates are likely to have a dampening effect on housing sales, at least psychologically. But from a purely dollars and cents point-of-view, rates have a long way to go before renting is cheaper than buying. According to Jed Kolko, chief economist at real estate search engine Trulia, the 30-year fixed rate would have to hit a whopping 10.5 percent nationally on a $200,000 mortgage before it would be less expensive to remain a renter.
****The tipping point, or the point at which it becomes cheaper to rent, varies by location because houses are more expensive in some places than others. But at 3.9 percent, buying is less costly in all of the 100 largest metropolitan areas.
****Put another way, at 3.9 percent, buying with a $200k mortgage is 41 percent cheaper than renting. Even at 5 percent, buying is 34 percent cheaper. It’s not until rates reach 10.5 percent that the math favors renting.
****For this analysis, Kolko’s research team at Trulia recently updated its “Rent vs. Buy” algorithms with the latest asking prices from March through May. Then, they calculated the cost of buying and renting identical properties, factoring for maintenance, insurance taxes, closing costs, downpayment, sales proceeds, a 30-year mortgage with 20 percent down, and rent.
****The analysis also assumes owners will stay in their homes for seven years, deduct their mortgage interest and property tax payments at the 25 percent tax bracket, and benefit from “modest” house price appreciation.
****The findings: In 78 of the 100 largest metros, the tipping point is 10 percent. And it is over 20 percent in Cleveland, Memphis, Detroit and several other spots.
****On other hand, if rates spike to just 5.2 percent, renting becomes the less expensive alternative in San Jose, Calif. Ditto in San Francisco when rates hit 5.4 percent, in New York when they reach 6.8 percent and in Los Angeles when they rise to 7.5 percent.
****“Because prices fell so much after the housing bubble burst and remain low relative to rents even after recent price increases, buying is still much cheaper than renting,” says Kolko. “That means that the recent jump in rates doesn’t change the rent-versus-buy math much.”
****The various market tipping points change depending on how long you keep your home and whether itemize. But even if the mortgage interest and property tax write-offs were eliminated entirely from the tax code, the Tulia analysis finds buying is still 29 percent cheaper than renting at a 3.9 percent mortgage rate.
****It wouldn’t be until rates hit 7.5 percent in this scenario that renting is more favorable mathematically.
****Of course, just because buying is cheaper doesn’t mean people can do so, Kolko is quick to point out. Some don’t have the prerequisite down, and others can’t qualify for financing. And even some folks who have the wherewithal and credit ranking to swing a deal won’t buy right away because inventory is so tight they have yet to find the next home of their dreams.
****If the rent vs. buy equation changes anything, the economist says, it’s demand for refinancing, as many lenders have already found out. “Unlike home buying, refinancing is a relatively straightforward financial decision,” he says. “Although refinancing has upfront costs, it doesn’t require finding a home, thinking hard about lifestyle or moving.”
****Like many other economists, Kolko believes rates are now on a relentless march upward. But he says, “it will take big rate increases to turn off prospective home buyers. At today’s prices and rents, rates would have to rise to levels we haven’t seen in 20 years before renting is cheaper than buying on average across the country.”
Lew Sichelman has been covering the housing and mortgage markets for more years then he cares to remember, starting as real estate editor at the long defunct Washington Daily News and Washington Star newspapers and finishing with a three-decade stint with National Mortgage News. His weekly column, The Housing Scene, is syndicated to newspapers throughout the country.