Trulia: Rent vs. Own Guided by Prices, not Rates

Ralph McLaughlin, chief economist with Trulia, San Francisco, says in the debate over buying a home versus renting, consumers should not be looking to the Federal Reserve for rate hikes, but instead to the market for prices.

“While the Federal Reserve Bank will likely increase interest rates later this year, rates would have to turn sharply higher to push the rent vs. buy decision towards renting,” McLaughlin wrote in the company’s monthly Rent v. Buy report. “Nationally and in the 100 largest markets, rising home prices are more likely to have an impact on homebuyers’ bottom line than increasing rates.”

Trulia examined where, and by how much, rates and prices would have to increase to erase the financial benefits of homeownership. Key findings include:

–Nationally, the benefits of lower mortgage rates have been mostly offset by higher prices. For households who move every seven years and can afford to put 20% down, it’s 37.7% cheaper to buy this year. This up just slightly compared to 37.2% last year.

–Buying is cheaper than renting in each of the 100 largest metros. The range is from over 50% cheaper in Miami and Fort Lauderdale, Fla., to under 20% in Honolulu and San Francisco.

–Homebuyers should be more concerned about rising prices than rising mortgage rates. Rates would have to more than double to wipe out the financial advantage of buying, whereas prices would only need to increase by 67%. In San Jose, Calif., prices would only need to go up by 24% for the cost of buying to be the same as renting, whereas rates would have to jump by 45%–or 1.6 points–for buying to cost the same as renting.

Mortgage rates, as measured by average rates reported by the Mortgage Bankers Association, have dropped sharply over the past year from 3.9% to 3.7%, but buying has only become a little cheaper than renting. “Home prices have outpaced rents, which erased most of the savings that homebuyers received from lower mortgage rates,” McLaughlin said. “But thanks to low mortgage rates keeping pressure on prices, buying a home today continues to be the best deal since 2012.”

The report said those trying to decide whether to buy or rent a home this fall will have the easiest decision in the South. Eight of the 10 metros that offer the largest financial advantage of homeownership are there, with Philadelphia and Syracuse, N.Y., being the only non-Southern markets to make the list. Buying a home in Miami and West Palm Beach, Fla., will be the easiest: after seven years of homeownership, buying a home is 53.2% cheaper than renting.

McLaughlin said potential homebuyers in the West and Northeast have a more difficult decision to make, although it’s still significantly cheaper to buy than rent. The financial advantage of homeownership is narrowest in Honolulu, but still 17.4% cheaper over seven years with 20% down. In San Jose, the margin is just 18.6, and in Milwaukee, it’s 19.6%.

“Even in markets where it the rent vs. buy decisions is toughest, [the] Federal Open Market Committee would have to raise rates aggressively,” McLaughlin said. “The FOMC has only raised rates once in the past 10 years, and prices would have to grow to their tipping with little movement in rents, the latter of which hasn’t happened since the housing market recovery began in 2012.”