HOMEOWNERSHIP 45 PERCENT CHEAPER THAN RENTING NATIONALLY, REPORTS TRULIA
Trulia Research Reveals How Mortgage Rates, Tax Deductions and Time Horizon Affect Rent vs. Buy Decision in New York, Los Angeles, Boston and Atlanta, Among Other Metros
SAN FRANCISCO, September 13, 2012 – Trulia today released its Summer 2012 Rent vs. Buy Report, which provides the inside scoop on whether buying a home is more affordable than renting
in America’s 100 largest metropolitan areas. 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.
Homeownership Affordability Highest in Detroit, Lowest in Honolulu and San Francisco
With a 3.5 percent mortgage, itemized deductions at the 25 percent federal tax bracket, and a seven-year time horizon, homeownership is cheaper than renting in all of the 100 largest U.S. metros by a wide margin. However, relative affordability depends largely on location. Buying a home is 24 percent cheaper than renting in Honolulu, 28 percent cheaper in San Francisco, and 31 percent cheaper in New York, but is 70 percent cheaper in Detroit. However, the actual dollar amount reveals that despite a low 28 percent difference in buying versus renting in San Francisco, the monthly dollar savings is big ($899) because rents and prices are so high in this region.
With a 3.5 percent mortgage, itemized deductions at the 25 percent federal tax bracket, and a seven-year time horizon, homeownership is cheaper than renting in all of the 100 largest U.S. metros by a wide margin. However, relative affordability depends largely on location. Buying a home is 24 percent cheaper than renting in Honolulu, 28 percent cheaper in San Francisco, and 31 percent cheaper in New York, but is 70 percent cheaper in Detroit. However, the actual dollar amount reveals that despite a low 28 percent difference in buying versus renting in San Francisco, the monthly dollar savings is big ($899) because rents and prices are so high in this region.
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Top 5 Metros Where Homeownership Affordability Highest
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U.S. Metro
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Monthly cost of homeownership ($)
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Monthly cost of renting ($)
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Difference ($)
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Difference (%)
|
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$349
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$1,149
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-$800
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-70%
|
|
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$616
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$1,649
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-$1,033
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-63%
|
|
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$590
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$1,576
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-$987
|
-63%
|
|
|
$495
|
$1,276
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-$781
|
-61%
|
|
|
$476
|
$1,222
|
-$746
|
-61%
|
|
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Top 5 Metros Where Homeownership Affordability Lowest
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U.S. Metro
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Monthly cost of homeownership ($)
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Monthly cost of renting ($)
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Difference ($)
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Difference (%)
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$1,519
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$2,007
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-$488
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-24%
|
|
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$2,327
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$3,226
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-$899
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-28%
|
|
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New York, NY-NJ
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$1,857
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$2,687
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-$831
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-31%
|
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$1,819
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$2,646
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-$827
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-31%
|
|
|
$1,379
|
$2,020
|
-$641
|
-32%
|
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Note: Cost of homeownership
assumes that the home is sold after 7 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 7 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.
Why Mortgage Rates, Tax Brackets and Time Horizon Matter in Rent vs. Buy Decision
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. The chart below illustrates how each of these factors can change the cost considerations in favor of renting or buying. In the New York metro area, a 4.5 percent mortgage rate, not itemizing one’s tax deductions and staying in a home for 5 years, will make homeownership 3 percent more expensive than renting, instead of being 31 percent cheaper. Meanwhile, homeownership remains 40 percent cheaper than renting in Atlanta, even with the higher mortgage rate, not itemizing and shorter time horizon.
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. The chart below illustrates how each of these factors can change the cost considerations in favor of renting or buying. In the New York metro area, a 4.5 percent mortgage rate, not itemizing one’s tax deductions and staying in a home for 5 years, will make homeownership 3 percent more expensive than renting, instead of being 31 percent cheaper. Meanwhile, homeownership remains 40 percent cheaper than renting in Atlanta, even with the higher mortgage rate, not itemizing and shorter time horizon.
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How Mortgage Rates, Taxes, and Time Horizon Affect Renting vs. Buying
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SCENARIO
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New York
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Los Angeles
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Boston
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Atlanta
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3.5% mortgage, 25% tax bracket, stay 7 years (baseline)
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-31%
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-32%
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-41%
|
-57%
|
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4.5% mortgage rate*
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-23%
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-24%
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-34%
|
-53%
|
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Not itemizing tax deductions*
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-18%
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-21%
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-30%
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-50%
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Stay 5 years*
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-21%
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-22%
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-32%
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-52%
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4.5% mortgage, not itemizing, AND 5 years
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3%
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-1%
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-12%
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-40%
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*For these scenarios, the factors not mentioned are the same as the baseline.
PRE-APPROVED QUOTES
- “Homeownership is cheaper than renting in all of the 100 largest metros, by a wide margin,” said Jed Kolko, Trulia’s Chief Economist. “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.”
- ”If buying a home is cheaper than renting in every major metro and makes financial sense in most situations, then why aren’t more people buying? The reason is because many people can’t take advantage of today’s affordability,” said Jed Kolko, Trulia’s Chief Economist. “It takes years to save enough for a down payment, and it takes a high credit score to even qualify for a mortgage, let alone to get the best rate. In the recession, many people found it harder to save – and harder to keep up their credit scores.”
MULTIMEDIA
- To view an interactive map illustration how mortgage rates, tax brackets and timing horizon can impact the rent vs. buy decision, click here.
- To view a full list of the rent vs. buy cost considerations for the 100 largest metros, click here.
METHODOLOGY
Trulia looks at homes for sale and for rent and calculates the average rent and sale price across all listed properties in a metro area. Then, Trulia factors in the total costs of homeownership (e.g., closing costs, maintenance, insurance, taxes, etc) and total cost of renting (e.g., renter’s insurance and security deposit). It assumes that a prospective homebuyer can get a low mortgage rate of 3.5 percent, itemize their federal tax deductions and are in the 25 percent tax bracket, and will stay in their home for seven years. To account for the opportunity costs, Trulia calculates the net present value of the payment streams for renting and owning. Click here to read the full methodology.
Trulia looks at homes for sale and for rent and calculates the average rent and sale price across all listed properties in a metro area. Then, Trulia factors in the total costs of homeownership (e.g., closing costs, maintenance, insurance, taxes, etc) and total cost of renting (e.g., renter’s insurance and security deposit). It assumes that a prospective homebuyer can get a low mortgage rate of 3.5 percent, itemize their federal tax deductions and are in the 25 percent tax bracket, and will stay in their home for seven years. To account for the opportunity costs, Trulia calculates the net present value of the payment streams for renting and owning. Click here to read the full methodology.
Source: Trulia News Room Press Release
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