Is it cheaper to rent a place to live? Or buy? A lot depends
on where you live.
Until the housing collapse in 2007, conventional wisdom held
that buying was a no-brainer: Home prices never went down,
the tax code offered generous savings to buyers and
homeownership amounted to a kind of forced savings.
Now, as the housing market stages an uneven recovery, the
decision to buy a home is no longer a slam dunk.
"You have a lot of folks out there who got burned by the
housing crisis and they may not have desire to buy," said
RealtyTrac Vice President Daren Blomquist.
The collapse of housing prices also upended the idea that
buying a home is a sure-fire investment. In fact, over much
of the last three decades, you would have come out ahead
renting, according to a 2011 study.
"Our study disputes the commonly accepted wisdom in the
United States that renting is always 'throwing away money,'"
said Ken Johnson, a Florida International University fellow
and one of the study's authors. "If renters exercise
disciplined investing over time, they can be more successful
in accumulating wealth than those who own a home."
That's a big "if." But the study also found that there have
been exceptions when buyers end up better off financially.
In most parts of the county, that's true today. But not
everywhere.
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An analysis of home prices and rents by RealtyTrac found
that in more than 90 percent of the counties it looked at, the
average rent is higher than the cost of buying a median-
priced home. The exceptions are in the handful of highest-
priced housing markets in the country—places like San
Francisco, New York and Arlington, Va. (The list also
includes some out-of-the-way housing hot spots like Teton
County, Wyo. and Gallatin County, Mont.)
On the other extreme, renters come out way behind in
places like Baltimore, where the average renter pays $1,600
a month—roughly 3.6 times the cost of buying a median-
priced home. Other high-rent counties include Clayton, Ga.
(where rents are 4.5 times the cost of buying) and Wayne,
Mich., (4.8 times the cost of buying.)
Still, there's more to the buy versus rent decision than the
basic monthly costs comparison. So before you call a real
estate agent and deliver the news to your landlord, here's a
little more math.
For starters, RealtyTrac's numbers assume you can come
up with a 20 percent down payment. For many first-time
buyers, that's a major hurdle. The rent-versus-own analysis
also figures you'll spend 0.35 percent of the amount of your
mortgage on homeowners insurance and another 1.04
percent on property taxes.
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But it doesn't include monthly costs like utilities—or the
occasional but inevitable cost of upkeep and repair—that
come with homeownership.
And just because it's cheaper to buy doesn't mean you'll be
able to qualify for a loan—especially if you're one of the 7
million former homeowners who lost their property to a
foreclosure or short sale.
"They may have the income to qualify but if they have that
foreclosure or short sale on their history, in the short term
that will disqualify them from buying," said Blomquist. "That's
a hurdle in this market beyond the monthly payment
numbers."
Even if you're credit is solid, rising interest rates are lifting
the income level you'll need to cover your monthly mortgage
payment.
Homebuyers shelled out $865 a month for a 30-year fixed-
rate mortgage on a median-priced home in the fourth quarter
of last year, up from $714 a month a year earlier, according
to RealtyTrac. The difference: the average interest rate
jumped from 3.35 percent to 4.46 percent.
The income needed to qualify for a median-priced home in
the fourth quarter of 2013 was $41,500, up from an average
minimum income of $34,250 a year earlier. (That minimum
assumes you'll spend no more than 25 percent of your
household income on your mortgage.)
But those are just the averages. In the priciest markets, you'll
need to show a lot more income on your tax returns to get
the nod from a mortgage company. In San Francisco, you'll
need to earn $228,500 to buy a median-priced home. Other
high-cost counties come with high minimums to qualify,
including Marin County, Calif., ($178,000), San Mateo
County, Calif. ($170,000), Arlington County, Va. ($158,500),
Santa Clara County, Calif. ($149,500) and Hudson County,
N.J. ($142,500).
What about retirement? I read an article in USA Today which
spoke about whether you could live comfortably in retirement
if all you had was $1,000,000. It turns out that while it’s a lot
of money it’s not quite enough. It could be, but it depends on
things like whether you still have a mortgage or not. If you’re
headed for age 60, we’ll say, and you’ll still have a
mortgage, you may want to think again.