Buying a home still trumps renting

October 17th, 2014

Affordable mortgage rates and rapidly rising rent prices have made buy a home an affordable housing option.

Homebuyers who have been considering the transition from renting to owning a home may have more encouragement to do so following a recent report from Trulia.

The residential real estate site published its Rent Versus Buy Report for the third quarter of 2014, which revealed buying a home was 38 percent cheaper than renting during that time. This was an increase from 35 percent in the same quarter a year ago.

The measurement is assessed assuming a homebuyer has a traditional 20 percent down payment and 30-year fixed-rate mortgage. Additionally, Trulia calculated the average for-sale and rent prices for similar properties. Then, those amounts were used to arrive at monthly housing costs, including mortgage payments, insurance, taxes and maintenance, and the report accounted for changes in future costs based on inflation. One-time expenses such as closing costs were also considered.

The report cited two reasons for the growing gap between the costs of renting and buying. First, rent prices have been climbing faster than home prices when excluding foreclosures. Mortgage rates have been at historical lows, with Freddie Mac reporting the average interest rate for a 30-year FRM was 3.97 percent in the week ending Oct. 16, down from 4.12 percent the previous week.

Detroit is the top city for buying versus renting
The Trulia data also included a ranking of cities where buying is clearly more affordable than renting. Here are the top 10:

  1. Detroit (63 percent cheaper to buy)
  2. Gary, Indiana (61 percent)
  3. Akron, Ohio (58 percent)
  4. Toledo, Ohio (58 percent)
  5. Cleveland (58 percent)
  6. Kansas City, Missouri (55 percent)
  7. Memphis, Tennessee (54 percent)
  8. Grand Rapids, Michigan (54 percent)
  9. New Orleans (54 percent)
  10. Birmingham, Alabama (54 percent)

The report noted buying is more affordable across most of the country, though there are some areas where the gap is slimmer. Honolulu, for instance, has the smallest disparity between renting and buying, as it was 17 percent cheaper to buy compared to renting in the third quarter of 2014. However, the data showed the scales will likely tip in favor of buying for some time.

“Even in the tougher-call markets, buying probably won’t become more expensive than renting soon,” the report said. “Home price increases are slowing.”

Additionally, mortgage rates have been going down throughout 2014 following a surge that began in the last quarter of 2013. This is further evidence that buying can remain the more viable option for some time, as mortgage rates would have to reach 6 percent to make renting more affordable in Honolulu.