Rent or Buy? Sell or Hold?

Fannie Mae's September 2013 National Housing Survey reported that 72% of Americans say now is a good time to buy a home; 38% believe it is a good time to sell.

According to Trulia, buyers are sometimes stunned at the number of potentially life-changing decisions and choices they are required to make over the course of a house hunt. This neighborhood or that one?  Condo or single family? Fixer or move-in ready? Is that the right house? How much to offer, and on what terms? When to make an offer?  Whether to remove contingencies?

And that’s just the short list.

But one of the most basic decisions real estate consumers ever make is the most impactful one, and it’s often one they make before they have the benefit of our expertise: whether to rent or to buy their home.

Trulia recently released a sophisticated Rent vs. Buy calculator – you can work with it here. The calculator allows smart would-be buyers to understand the many economic factors that influence whether it is cheaper to rent or to buy in their area and more importantly, in their personal situation, including line items like:

·         how long you intend to stay in the home;

·         your income tax bracket;

·         mortgage down payment, term and interest rate;

·         property taxes;

·         closing costs or selling closing costs;

·         rental and homeowners insurance; and

·         utilities.

The calculator also makes it incredibly simple for consumers to understand alternative scenarios by changing the mortgage rate, the income tax bracket for tax deductions, and the number of years that they plan to stay in the home.

Trulia's Chief Economist Jed Kolko provides answers to the math – and the myths – around the rent vs. buy cost factors nationwide.  Here’s what he had to say:

Myth:  Rising home prices and mortgage rates make it more expensive to buy than to rent.

Fact: Homeownership remains cheaper than renting nationally and in all of the 100 largest metro areas. But rising mortgage rates have narrowed the gap between the cost of buying and the cost of renting.

The 30-year fixed rate is now 4.80%, compared with 3.75% one year ago (according to the Mortgage Bankers Association, or MBA). This jump in rates has raised the cost of buying relative to renting. As a result, buying is 35% cheaper than renting today, versus being 45% cheaper than renting one year ago.

The key reason buying is still cheaper than renting is this: both rates and prices are rising from very low levels and are still below their long-term historical norms. But the rent versus buy math depends on your local market, as rising rates and prices have pushed a handful of metros very close to the tipping point when renting becomes cheaper.

Myth: The mortgage interest deduction is the only reason home ownership is more affordable than renting.

Fact: A key factor affecting the rent-versus-buy math is whether you itemize deductions on your income taxes and what tax bracket you’re in. If you itemize, you can deduct mortgage interest payments (not principal payments) and property tax payments from your income before calculating how much you owe in taxes. That said, only 33% of tax filers choose to itemize. Itemizing lowers the cost of buying relative to renting – especially if you pay taxes at a higher rate, because that means you’re deducting more.

But buying remains cheaper than renting almost everywhere even if you don’t itemize. Without itemizing – or if your tax situation means you get no benefit at all from itemizing – buying looks 22% cheaper than renting nationally. And buying still beats renting in 97 of the 100 largest metros – everywhere but San Jose, San Francisco, and Honolulu, even without assuming that the buyer will itemize their taxes and use the mortgage interest deduction.

Happy Investing!