Mortgage rates increased last week to a four-month high, but according to Trulia’s latest rent vs. buy study, rates would need to double, even triple, to make renting the better financial choice over buying a home.
Trulia’s study says that buying a home is 37.7 percent cheaper than renting on a national basis for homebuyers who put down 20 percent on their home purchase and stay put for seven years. This percentage is up from last year’s 37.2 percent.
As far as the nation’s 100 largest metros, it’s cheaper to buy in all of them. Even in notoriously expensive markets like Honolulu, HI where the median home value tops $629,000 and median rent prices will cost you $2,500, you still get 17 percent more bang-for-your buck from homeownership.
Will Homebuying Ever Become More Expensive Than Renting?
At the middle of the pack, where buying is 37 to 40 percent cheaper than renting, stand metros like Chicago, St. Louis and Albany.
In Chicago, where the median home price is $216,875 and the median rent is $1,750, mortgage rates would need to hit 10.3 percent to close the buying over renting margin. Mortgage rates haven’t been that high since the early 90’s, according to Bankrate.
Will Home Price Increases Close the Gap?
With a highly speculated federal funds rate increase in December, many potential homebuyers have expressed concern about the potential of rising mortgage rates. According to Trulia’s analysis, homebuyers are more likely to be impacted by rising home prices.
The median home value tipping point for the U.S. is $467,772, or nearly 70 percent higher than today’s median value of $280,103. In Chicago, the median home value would need to jump 65 percent to erase the financial benefits of owning over renting.
So Why Are So Many Still Renting?
There are 9 million more renters in the U.S. than a decade ago, the biggest jump on record. Nearly half of all renters are cost-burdened, meaning they’re spending more than 30 percent of their income on rent, according to an annual study by the Harvard Joint Center for Housing Studies.
So if homeownership is the cheaper option, why is anyone still renting?
Trulia’s rent vs. buy model is based on the assumption of a 20 percent down payment and in markets like San Francisco, San Diego and Oakland, the median home prices are $500,000 and up. For potential homebuyers attempting to set aside money for a house, pay down debt and student loans and make monthly rent payment, a 20 percent down payment is an enormous obstacle.
Luckily there are several mortgage options available that allow homebuyers to put down less than 20 percent. To see a rent vs. buy scenario with a 5 percent down payment, see our cost comparison of owning versus renting over a 7-year period.
To learn more about what it takes to get out of the rental circuit and purchase your first home, download our free Mortgage 101 Handbook.