Wow! Did you realize that today’s mortgage rates and home prices combine to make it 42% cheaper to buy a home in the Seattle area than to rent? Big difference, eh? Nationwide it’s 44% cheaper to buy than to rent… but this picture will be changing according to Trulia. Check Trulia’s infographics to see where it is cheaper to buy a home versus rent: Rent vs. Buy – Trulia Trends.
Sounds like a ‘good deal’ for today’s homebuyers, but how will the rent-versus-buy math change over the next year? Two factors matter the most: (1) whether prices or rents are rising faster, and (2) what’s happening to mortgage rates. Looking forward, the gap should narrow more sharply… and, both factors will work together to raise the cost of buying relative to renting.
Home prices likely to rise faster than rents
First, home prices are likely to keep rising faster than rents. The continued economic recovery will make people more able and interested to buy a home, boosting the demand for housing while inventory remains tight, fueling price increases. At the same time, the increase in multi-unit-building construction should add more supply, especially to the rental market, which will keep rent gains modest.
Mortgage rates likely will rise
Second, mortgage rates are likely to rise in the next year as the economy improves, even though they fell in the past year. The consensus among macroeconomic forecasters is for 10-year Treasury bonds –which 30-year fixed-rate mortgages track pretty closely – to rise 6 or 7 tenths of a point over the next year. This translates roughly into a 7-9% higher monthly payment for a given mortgage.
Buying will be less affordable next year relative to renting
Together, prices outpacing rents and higher interest rates will make buying less affordable next year relative to renting than it is now. By this time next year, the cost of buying could even exceed the cost of renting in some of the priciest metros like San Franciso and New York. The rent-versus-buy decision depends on many factors, both economic and personal, and next year the math could look very different.
How can renting be the better deal?
Three factors have a real impact on the rent-versus-buy math:
- Mortgage rates
- Tax deductions
- How long you stay in your home
Change any of these factors, and buying a home won’t look quite as inexpensive relative to renting. Using our baseline assumptions of getting a 3.5% mortgage rate, deducting at the 25% bracket, and staying in your home for 7 years, buying is 42% cheaper than renting in our area. Click here to read more…