Bucks Blog: Rising Rates, and the Rent vs. Buy Decision

Mortgage rates have been rising, making it a bit more expensive to borrow to buy a home.

Home prices have been on the upswing, as well. (The Standard Poor’s Case-Shiller home price index showed a 12 percent gain in home prices in 20 cities from April 2012 to April 2013.)

But some perspective is warranted. Mortgage rates are still historically low — they’re expected to hover around 4 percent for the second half of the year, according to Freddie Mac. (The average rate for a 30-year, fixed-rate mortgage was 3.93 percent last week; a year ago, the average was 3.71 percent).

And while home prices are rising, they are still relatively affordable. According to a Freddie Mac statement on June 18, “At today’s house prices and income levels, mortgage rates would have to be nearly 7 percent” before the typically priced home would be unaffordable for most families making a typical income.

Jed Kolko, chief economist at Trulia, a real-estate site, wrote in a recent blog post that despite the recent upswing in mortgage rates, the cost of owning a home is still low when compared to the main alternative: renting. In most markets, he argued, buying is cheaper than renting, and it will remain so until mortgage rates move significantly higher.

To see how much rates would have to rise before it becomes cheaper to rent, Trulia updated its “rent vs. buy” analysis to reflect home prices and rents (based on properties listed for sale and for rent on Trulia) from March, April and May. The result? Rates would have to rise to an average of 10.5 percent before the scales tip in favor of renting nationally, Trulia found.

In some markets where home prices are much higher, like many cities in California, the calculated “tipping point” is much lower. In San Francisco and San Jose, rates have to climb just over 5 percent to make renting more attractive. In New York and New Jersey, the tipping point comes around 7 percent.

While such rent vs. buy comparisons can be informative, they are, by necessity, made using a series of assumptions, which may or may not reflect your personal financial situation, said Daniel McCue, research manager at the Joint Center for Housing Studies of Harvard University.

For instance, he noted, Trulia’s calculator assumes a 20 percent down payment. For a $200,000 home, that is $40,000 — an amount the typical renter is unlikely to have handy.

The site’s rental listings also may not capture many individual apartments owned by smaller landlords, which may be less expensive than large, investor-owned apartment complexes, he noted.

The analysis also assumes that the buyer will stay in the home for seven years and so will   benefit from a modest appreciation in price. But if you are young and mobile, you aren’t necessarily going to stay in a house that long — so you lose out on the chance to earn back closing costs and other home-buying expenses.

(A complete list of the calculation’s assumptions is available on Trulia’s Web site).

In short, rent vs. buy calculations can help track trends, but it’s hard to say that there is a single, magic number where home buying must be cheaper than renting — for you.

Are rising mortgage rates affecting your decision to buy a home? Do you think continuing to rent makes sense?

Article source: http://bucks.blogs.nytimes.com/2013/06/28/rising-rates-and-the-rent-vs-buy-decision/?partner=rss&emc=rss