Buying a Home Is 45% Cheaper Than Renting

The most important housing decision that most consumers face is whether to rent or to buy. So to help them with this decision, we took a look at the key market factors affecting the cost of homeownership.  First off, asking home prices have started to rebound and have risen by 2.3% year over year in August (3.8% excluding foreclosures); however, rents have risen more (4.7%). This means that prices are lower relative to rents than they were a year ago. But more importantly, mortgage rates have fallen: the best rates this summer have been around 3.5%, while last summer rates were closer to 4.5%. Based on asking prices and rents during the summer of 2012, buying is now 45% cheaper than renting in the 100 largest U.S. metros, on average -- that's a savings of $771 a month. If you plan to stay in a home for 7 years, which is the average time that Americans traditionally live in a home before moving again, it is more affordable to buy than to rent in ALL of the 100 largest metros in the U.S.

Costs aside, the decision to rent or buy a home is very personal. There's a strong emotional component: some people want the security of homeownership and others want the footloose freedom of renting. But the financial factors are also very personal because the decision to rent or buy depends on:

1. Can you qualify for a mortgage at the best rate available?
2. Which tax bracket are you in, and do you itemize your deductions?
3. How long will you stay in your home?

To calculate whether renting or buying costs less, we assume people can get a low mortgage rate of 3.5%, itemize their federal tax deductions and are in the 25% tax bracket, and will stay in their home for seven years. (Below, we'll show how changing these assumptions can affect the rent-versus-buy math.) We do the following calculations:

• First, we looked at all the homes for sale and rent listed on Trulia in June, July and August 2012. On for-sale homes, we took the asking price and estimated what it would rent for; for rentals, we took the asking rent and estimated what it would sell for. That way, we can calculate the average rent and asking price for an identical set of properties in a metro area, for a direct apples-to-apples comparison. By looking at homes currently for sale or rent, we're able to illustrate the actual housing options that consumers face right now.

• Second, we estimated the total costs of renting and buying for the typical property in a metro over a seven-year period. We factored in all the costs of homeownership (e.g., closing costs, maintenance, insurance, taxes, etc.), along with the tax benefit of deducting mortgage interest and property taxes, as well as the proceeds from selling the home after seven years with modest home price appreciation. On the rental side, we factored in renters' insurance and the security deposit. Finally, we calculate the net-present-value of all those costs to capture the opportunity cost of tying your money up in a down payment. This gives us the total cost of buying versus renting. We then calculated the dollar difference and percentage difference between renting and buying.

• Finally, we looked at alternative scenarios of the costs of renting versus buying, by changing the mortgage rate, the income tax bracket for tax deductions, and the time horizon.

Where Buying is a Slam Dunk
With a 20% down payment, a 30-year fixed mortgage rate at 3.5% and at the 25% federal tax bracket, homeownership is cheaper than renting in all of the 100 largest metros by a wide margin. There is no market where the financial decision is even close, so long as you plan to stay in the home for at least seven years, get 3.5% mortgage, and itemize your tax deductions. However, how much cheaper it is to buy a home than to rent really depends a LOT on where you live.

Buying is 24% cheaper than renting in Honolulu, 28% cheaper in San Francisco, and 31% cheaper in New York. On the other end of the spectrum, homeownership is extremely affordable in Detroit, where buying a home is 70% cheaper to buy than to rent, and 63% cheaper in both Oklahoma City and Gary IN. Check out the top 10 lists below to see where the cost differences between buying and renting are smallest and largest.

Where the Financial Advantage of Buying Over Renting is Smallest
U.S. Metro	Monthly cost of home ownership ($)	Monthly cost of renting ($)	Difference ($)	Difference (%)
Honolulu, HI	$1,519	$2,007	-$488	-24%
San Francisco, CA	$2,327	$3,226	-$899	-28%
New York, NY-NJ	$1,857	$2,687	-$831	-31%
San Jose, CA	$1,819	$2,646	-$827	-31%
Los Angeles, CA	$1,379	$2,020	-$641	-32%
Ventura County, CA	$1,516	$2,274	-$759	-33%
Orange County, CA	$1,610	$2,423	-$813	-34%
San Diego, CA	$1,314	$1,981	-$667	-34%
Albany, NY	$999	$1,535	-$536	-35%
Long Island, NY	$1,603	$2,513	-$910	-36%

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 cost is based on net present value of costs over 7 years. Monthly costs are based on the average across all properties listed in the metro area, including those for sale and those for rent, in summer 2012.

Where the Financial Advantage of Buying Over Renting is Huge
U.S. Metro	Monthly cost of home ownership ($)	Monthly cost of renting ($)	Difference ($)	Difference (%)
Detroit, MI	$349	$1,149	-$800	-70%
Gary, IN	$616	$1,649	-$1,033	-63%
Oklahoma City, OK	$590	$1,576	-$987	-63%
Lakeland-Winter Haven, FL	$495	$1,276	-$781	-61%
Toledo, OH	$476	$1,222	-$746	-61%
Dayton, OH	$524	$1,332	-$808	-61%
Warren-Troy- Farmington Hills, MI	$588	$1,494	-$907	-61%
Memphis, TN-MS-AR	$548	$1,389	-$841	-61%
Cleveland, OH	$585	$1,464	-$879	-60%
West Palm Beach, FL	$723	$1,764	-$1,041	-59%

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 cost is based on net present value of costs over 7 years. Monthly costs are based on the average across all properties listed in the metro area, including those for sale and those for rent, in summer 2012.

What does this mean in dollars? Buying is cheaper than renting by several hundred dollars a month in every large metro. The charts above show how the percent difference in buying versus renting may be smaller in San Francisco (-28%) than in almost all other metros, but the annual dollar savings is big ($899) because the rents and home prices there are so high - so even a smaller percentage difference means a big dollar difference. (Remember that we're looking at the annual cost of buying or renting the typical listed home. Most homes listed are for-sale, and for-sale homes tend to be much larger than rentals, on average. That's why the monthly cost of renting the typical home is higher than the actual amount most renters pay.)

Why Mortgage Rates, Tax Brackets and Timing Matters in the Rent vs. Buy Debate
But what if you can't get the best mortgage rate, don't itemize your tax deductions or stay in your home for less than seven years? Each of those raises the cost of homeownership, so buying wouldn't be quite as good of a deal relative to renting. Here's why each matters:

• The best mortgage rates are available for people with the best credit scores -- and a not-so-hot credit score could make your mortgage a full percentage point higher, which translates to at least a 10% difference in your monthly mortgage payment.
• Itemizing your tax deductions lets you subtract your mortgage interest and property tax payments from your pre-tax income, which lowers your tax burden especially if you're in a higher tax bracket. How much does not itemizing raise the cost of homeownership? It depends on your tax bracket and the amount of mortgage interest and property taxes you would deduct.
• Selling a home in less than seven years after buying it means that you're spreading your buying and selling closing costs overfewer years -- making the average monthly cost of homeownership higher.

To see how your mortgage rate, tax bracket and time horizon affect the cost of renting versus buying, let's look at several scenarios for a few large metros:

SCENARIO	New York	LA	Boston	Atlanta
3.5% mortgage, 25% tax bracket, stay 7 years (baseline)	-31%	-32%	-41%	-57%
4.5% mortgage *	-23%	-24%	-34%	-53%
Not itemizing tax deductions *	-18%	-21%	-30%	-50%
Stay 5 years *	-21%	-22%	-32%	-52%
4.5% mortgage, not itemizing, AND 5 years	3%	-1%	-12%	-40%

* For these scenarios, the factors not mentioned are the same as the baseline.

Take Los Angeles, for instance. The top row shows that if you can (1) get a 3.5% mortgage, (2) are in the 25% tax bracket and itemize your deductions, and (3) stay 7 years, it's 32% cheaper to buy than to rent.

Change any one of those scenarios, and buying is still cheaper than renting but less so:

•  With a 4.5% mortgage instead of a 3.5% mortgage, buying drops from 32% cheaper than renting to 24% cheaper.

• Failing to itemize tax deductions drops buying from being 32% cheaper to 21% cheaper.

• Staying 5 years instead of 7 makes buying 22% cheaper.

• But all three - the 4.5% mortgage, not itemizing, and staying only 5 years - makes buying just 1% cheaper than renting - as the bottom row shows.

In New York, these same differences make buying 3% MORE expensive than renting instead of 31% cheaper. In fact, with a 4.5% mortgage, not itemizing and staying only 5 years, buying is more expensive than renting in Honolulu (by 13%), San Francisco< (by 10%), and San Jose (by 4%), too.

In the other 96 of the 100 largest metros, though, buying is still cheaper than renting. In Atlanta, for instance, where buying is 57% cheaper than renting in the best of circumstances (3.5% mortgage, itemizing, and staying 7 years), buying remains 40% cheaper even with a 4.5% mortgage, not itemizing, and staying only 5 years. In fact, today's low mortgage rates make it financially better to buy even if you only stay put for 3 years in many metros. But buying a home also involves a lot of time, emotional energy and financial risk, so we can't really recommend buying a home that you plan to live in for just 3 years even if the financial calculation is in favor of buying. Money isn't everything.

If Buying is So Cheap ...
... why isn't everyone doing it? Home sales are still less than halfway back to normal, and the homeownership rate continues to fall. The big obstacle holding back renters who want to buy is the down payment -- even more than getting a mortgage. And keep in mind, in the metros where the cost of buying is less than half of what it would cost to rent over the long term, it still takes years to save enough for a down payment. It may be 56% cheaper to buy than to rent in Denver, for instance, but it takes more than 8 years to save enough for a down payment there. And high unemployment during the recession made it even harder than usual for people to save for a down payment. On top of that, people who lost their homes or took on lots of debt might not qualify for a mortgage.

Bottom Line: Buying may beat renting in every major metro by a wide margin, saving consumers thousands of dollars a year, but buying still remains out of reach for many would-be homeowners.

 

Follow Jed Kolko on Twitter: www.twitter.com/JedKolko

Comments

[MWMnFTL]

01:06 PM on 10/09/2012

Ah, yes, the "American Dream"...again...from a real estate professional. I'm close to the West Palm Beach numbers listed in the article, but there are SO many other variables that work against owning a home. My mortgage is below what I used to pay in rent by about $200/month. Here's a breakdown, though:

Apartment: secure parking garage (included), gym (included), business center (included), 24-hr concierge (included), pool/sauna/spa (included), building maintenance (included), landscaping (included), trash/water (included)

Home: None of the above included. (ok, I do have a pool, but it is anything but included in the cost of my mortgage except for eventual value) STUPID insurance rates in Florida (not included), STUPID water rates in Florida (not included). Add to this the every-2-week cycle or either working in the yard (mowing, trimming, planting, etc) or working in the house (cleaning, repairs, etc), quarterly pest control visits, air conditioning checkups/repairs, pool supplies.

I mean, really - so, owning a home means you get to pay more for the privilege (ok, so you have some equity, fine) with the only benefit being able to potentially sell it 7 years later at a higher price than you bought it for??

[kristinward]

01:43 PM on 10/04/2012

Most people choose not to own for reasons beyond the price tag. Generally speaking owning is cheaper and its a better investment. However if you can't or won't be able dedicate at least 5 years to a property its probably not in your best interest. Its much easier to move from apartment to apartment then it is to move from house to house.

That being said, credit plays a large role in not owning as well. Most landlords do check credit, i know i do using http://www.tenantverification.com, however they are generally a lot less picky then a bank is when a customer needs a loan.

[stealthreinvest]

04:51 PM on 09/23/2012

This article is correct. In most cases, it's cheaper to own than rent, in certain markets. With FHA and other mortgage rates cheaper than ever, most of the time, a mortgage on a starter home is cheaper than renting an apartment or single family home. There are still tons of deals to be had, especially if you don't mind putting in sweat equity into your home.

[Ladislas]

11:21 AM on 09/22/2012

Does this takes into account for things renters are not responsible for: roofs, blown boilers/ water heaters, insects and pests damage, plumbing problems, driveway maintenance and snow/leaves removal? Those things pile up real quick...

[successpartner]

09:01 AM on 09/19/2012

There is a simple RENT OR BUY calculator at

http://tresory.com/applications.html

check it out!

[zjin]

06:58 PM on 09/17/2012

Noting that renting is cheaper than owning doesn't answer whether either is rationally affordable given stagnant or declining incomes, rising income volatility, and a cost inflation of essential human necessities greater than the general CPI. If one is to rationally save for the future, much less of one's income should go into shelter than has been the case in prior generations.

[Gurus4You]

09:11 AM on 09/15/2012

You correctly point out that in states with high taxes and high housing costs, it doesn't make much economic sense to buy a home. Many of us in California are already painfully aware of this.

Also, I may have missed this, but you didn't include the AMT which nails many of us because to have high mortgages and high taxes to pay and deduct.

In our area of California one could rent a home equal to or better than the quality of our home for $1000 - $2000 less per month than what we pay for our mortgage. Throw in property taxes, AMT, upkeep, etc. it doesn't make any economic sense to buy a home in California.

[BOBinPS]

07:34 PM on 09/16/2012

Again, it depends upon your tax bracket. It also depends upon rate of investment return and expectations of home appreciation. It depends upon the age of your home which directly affects repair costs. As long as the deduction for mtg interest and property taxes exist, I find it hard to justify you conclusions. I'm in CA too. I do see your point about AMT. I do what I can to avoid it by increasing home equity. It is a balancing act......

[econ1]

08:14 PM on 09/14/2012

Unfortunately the US has favored housing purchases with mortgage deductions, capital gains benefits, roll overs etc. for years. It has resulted in more of the nation's wealth being tied up in homes than in factories compared to other developed nations that don't single out housing. That, and artificially low interest rates, has increased the prices of houses (of benefit to banks, developers, agents etc...but not to the homeowner). The government is trying desperately to increase the cost of housing again...repeating the mistakes of the past. It won't end well....again.

[conservativewhitemale]

07:24 PM on 09/14/2012

Here's the carrot, take the debt, right? Right now, in this economy, there's value in mobility. That aside, who's NOT taking a hit, selling their house in this market? And THAT aside, the average 25 year return on investing in a house, is at best 4%, and that was BEFORE this pot hole. Pay the money to live as you see fit, and put your money just about anywhere else, to see a better return.

[NYCKitty]

03:37 PM on 09/14/2012

Mortgage is one thing. Property taxes are another. My parents property taxes on a single family, detached house in the Bronx are over $3k a year.

My husband and I have been looking in Westchester and since we're "poor" we can only afford certain areas like Yonkers. A $315k house has property taxes of over $12k. There is something VERY wrong when 4% of the home's value is being taxed yet the $26mm home in Bedford has a 1% tax rate on it's property (and yes, that tax bill is over $250k).

[Gurus4You]

09:12 AM on 09/15/2012

Yup - and don't forget the AMT that hurt's many homeowners in New York and other expensive states.

[Robert SF]

03:08 PM on 09/14/2012

If Buying is So Cheap ...
... why isn't everyone doing it?
===

Because the truth is that buying is NOT so cheap. It's not cheaper than renting unless you put together a just-so scenario that's as stable as a house of cards in a strong wind. Sure, if you add everything up and work it just right, at the end of some period of time you may have spent less buying than renting. But as far as the month-to-month payment is concerned, which is what limits most people, renting is cheaper than buying.

[Carl Caroli]

02:54 PM on 09/14/2012

I can tell you property taxes in N.J. are onerous.

[JustinP213]

09:30 PM on 09/14/2012

Indeed

[RustBeltCrooner]

02:07 PM on 09/14/2012

This is a valid comparison of buying a house versus renting a house. But most people rent apartments. For empty nesters, renting a one bedroom apartment is a lot cheaper than buying a house, which usually has a minimum of three bedrooms and cost a lot to heat and cool. Also, you failed to consider maintenance costs, which are zero for an apartment and 2% of the purchase price per year (or more) for a house.

[leftcoastindy]

10:56 AM on 09/14/2012

20% in Orange Co, Ca is about $100K. $60K for a 2 bed condo. Not many can save that in less than a decade.

[Gerald Bowman]

10:16 AM on 09/14/2012

Your numbers may be statistically accurate but they obscure the situation on the ground. You won't find parity between the purchased property and the rental property in terms of neighborhood and quality of life. Where in LA can you find a house, or even a condo, in a halfway decent neighborhood that has a total cost, including mortgage, insurance, maintenance, etc. for less than $3,000 a month? I guess you could buy a bank owned property in a bad neighborhood for a price that would result in a monthly outlay of $1,379. But I haven't seen one in a neighborhood worth buying into and it would sit on the market for like 5 seconds if it existed.

I have a fairly typical downtown LA apartment that goes for about $1,500 a month. A similar condominium IN THE SAME NEIGHBORHOOD would cost a minimum of $250,000 so the mortgage would be higher than your numbers, even after the tax break. Even if you factor in the tax benefits it still doesn't work out quite as represented here.

[Carl Caroli]

02:56 PM on 09/14/2012

And when something breaks you just make a phone call.