Buying a home is now more affordable than renting in most places, but there could be changes on the way.
According to the ATTOM Data Solutions 2017 Rental Affordability Report, which analyzed data from 540 counties nationwide, buying a home is the more affordable housing option in 66 percent of the markets, up from 58 percent last year. However, the potential for rising interest rates this year could put up barriers to buying a home and keep potential homeowners renting.
Here’s what you need to know about the current real estate market and what to look for as the year goes on.
Buying beats renting most of the time
Buying is often recommended over renting in the long term because your mortgage payments build equity in your home – which you’ll eventually own – while your rent only goes toward maintenance and your landlord’s wallet. However, in today’s real estate market the monthly costs of buying are also preferable to renting.
According to the report, the total monthly cost for a median-priced home in the U.S., including insurance, taxes and the mortgage payment, is more affordable than the equivalent rental costs for a three-bedroom property in 354 of the 540 analyzed counties. Several major cities are located in those 354 counties, including Chicago, Phoenix and Las Vegas.
Even when renting is an affordable option, buying a home is often more affordable. Anderson County, TN, for example, is one of the most affordable rental markets listed in the report, requiring 25.1 percent of an average wage for housing costs each month. Yet buying in this county only requires 16.4 percent of average wages, making it much more affordable.
Where renting is more affordable
According to the report, renting is more affordable than buying in just 186 analyzed counties, including counties featuring major cities like Los Angeles and Seattle. However, in many of these areas the costs for either option are so high that renting is only slightly more cost-effective.
For example, the report found it’s more affordable to rent than buy in most counties of both New York City and San Francisco, two of the most notoriously expensive rental markets in the country. The cost to buy a median-priced home in Kings County (Brooklyn), New York and San Francisco County, California approach or exceed 100 percent of average wages. While this isn’t the case in every market, a combination of high overall housing costs, lack of inventory and stagnant wages in these areas make housing decisions much more difficult.
Housing costs are rising faster than wages
These numbers are troubling because traditional budget advice says you should spend no more than 30 percent of your income on housing. Unfortunately, housing now demands an average of 38 percent of a resident’s income across the country, according to the report
On top of this, the report notes that the costs of both buying and renting a home are rising faster than wages in the majority of the 540 analyzed counties. Home prices rose 5.7 percent in the last year and rental costs rose 4.2 percent, while wages have only increased 2.2 percent since the second quarter of 2016. This means higher home costs and less money to pay them.
With the possibility of interest rate increases in 2017 and the question of how the real estate market will react under a new president, those ready to buy now should try and close their deals soon. For those unsure, it’s time to reach your decision: do you want to continue renting this year or settle down in a home? Some experts predict more rental availability in 2017, which could lower costs, but you should do your best to bring your housing costs down to 30 percent of your budget regardless of which option you choose. Whether it’s a 30-year mortgage or a one-year lease, you don’t want to be stuck paying more than you can afford.
I’m getting married this summer and want to move into a home afterwards. Like you said, renting is more affordable in some areas, but where I’m planning on living, the homes are actually quite affordable. Although I’ll pay more initially, I think it’s a good investment.
I live in a southwest suburban area in Illinois. Before I bought my house in 2014 I went apartment hunting and for a 3 bdr 2bath the rent was 1,600 not including light, gas, water bill and if you wanted private parking a garage space was 100.00 a month. Not to meantion I would have still been living in a apartment building with other people. Yes I have spent a lil money on the outside thats because I wanted it to look really nice but once it is the way I want it I can sit back and relax. BTW my mortgage including insurance and taxes are 300.00 cheaper than what I would have rented a apartment for. I’m glad I decided to buy instead of renting.
I like how you mentioned that buying a home is recommended over renting in the long term. My husband and I have been talking about settling down and moving into a house, but we weren’t sure if it would be better to rent or buy. I hadn’t really thought about how mortgage payments build equity while rent is just money gone. With that in mind, I think buying a house would be the better option for us.
It can be a hard decision to make when the cost of renting vs. buying is nearly the same, but all in all, purchasing a home is definitely a better choice from an investment standpoint. Homebuyers just need to be very realistic in terms of what they can actually afford when selecting a home to purchase.
Aside from the monthly carry costs of either choice, buying versus renting can have a time component that comes into play. Certainly there are up-front and exit costs for renting a home or apartment (realty finder fees, up-front security deposits, a month’s rent in advance, etc) these are minimal compared with the costs of getting a mortgage (typically 3-5 percent of the purchase price in up-front costs) and what can be up to a 6 percent cost to sell the property down the road. There are also maintenance costs for a property you own, reckoned at perhaps 1 percent of the value of the home.
This is why it’s important to consider how long you plan on staying put, as you’ll need typically up to 5 years to give yourself better odds of making (or at least not losing) money on the purchase of the home. Still, even if you do end up using a portion of it, it’s worth considering that you have a reasonable chance of making money with a property you purchase if you are there for a while… but you have no such chance of making money with one you rent.
Keith:
Great thoughts. And, you’re absolutely right. Buying a home and then staying put for awhile (years, maybe even decades) is the way to make homeownership pay off. The problem is that so many people will buy and then try to flip, or sell because their circumstances have changed. And, maybe it’s been 2 to 5 years, but that generally isn’t enough time to allow the home to have appreciated to a level where all of the other costs of sale will get covered.
Thanks for your comment.
Ilyce Glink, Publisher
I’m going to buy, but only when I’ve saved up enough to pay in full, in cash.
While waiting for that, I will make smart decisions with my money:
1) Paying off my debts as they come to me. Never holding a credit card balance longer than a month. If this means living in a small studio apartment and eating ramen, rice, and beans, so be it.
2) I will always buy small, fuel efficient and durable cars. I drive a 2006 Honda Civic now. It costs me nothing to fill up and next to nothing to insure ($25/month from Insurance Panda… woohoo!). I will not drive when I don’t need to, and use public transportation whenever possible.
3) Developing multiple revenue streams. Doing side jobs. Building up small businesses. Doing contract work. Basically doing whatever I can to generate income from multiple sources.
4) Grow my revenue and assets no matter what. Make sure I am always expanding and develop them to the point that they consistently generate reliable cash flow.
5) I need life insurance to protect my daughter, but I ditched a $275 a month whole life policy for a policy and now I only spend $25 a month. I save the difference to my Roth IRA.
6) The most important one – make as much as I can. Save as much as I can.
Amy,
I love the sentiments you’re espousing! Great ideas, with one exception. I don’t think you need to wait until you’ve saved up enough money to buy a house for cash. There’s nothing wrong with a mortgage – particularly at the jaw-dropping, historic interests we’re seeing now, in mid-2017. But the way you’re thinking about money is smart, particularly ditching your whole life policy for what I assume is a term life insurance policy. That’s a great move.
Earn as much as you can. Save as much as you can. That’s the best way to grow rich. Thanks for your comments.
Ilyce Glink, Publisher
ThinkGlink.com
I’m glad to own my own house and not renting. With renting, in a way, you are paying your landlord’s expenses of home ownership such as his/her mortgage, insurance, property taxes, maintenance, etc. in the monthly rent while building your landlord’s equity instead of yours. Also, if maintenance on a homeowner’s part is kept up then that Likely could prevent most damage that require costly repairs as well as keeping the house in good shape and looking nice. I see it as if an appliance breaks, then I can pick out the replacement I want to buy and am not stuck with what the landlord gives me.
Also another bad thing about renting is you cannot improve or make any modifications to the house without approval from the landlord and if the landlord decides to quit renting the house you live in or decides to sell it when your lease is up, then he/she can kick you out with you being left high and dry to find another place to rent and finding another place to rent can be a royal pain in the rear. Also, the landlord can increase your rent as well too when you renew your lease.
I believe renting is good for very short term but buying is much better for long term.
We are in the process of selling a home we bought 5.5 years ago. It’s a beautiful home, almost 4000 sq ft, mountain view, creek & 7 acres in the country with good schools but we are losing money. House prices are down in our area & several businesses have closed leaving many out of work. By the time you add in repairs, maintenance & the necessary upgrades we have made we are losing over $100,000 plus. We paid ahead on the principle so out of $279,000 we owe less than $115,000. We rented a house just as big for $1500 per month less before we bought this one. Do not count on your house increasing in value, don’t forget to budget for repairs some some high like the heat pump we had to replace & be careful how much you put into upgrades or you may end up in a situation like ours.
Sylvia,
Thank you for sharing your story. I’m so sorry that your home purchase didn’t work out. And, you’re right, it’s more expensive to own a bigger house. a lot of buyers don’t think about that when they’re falling in love with the biggest purchase of their lives. But good for you for prepaying your equity. At least you’ll have the option to walk away.
Good luck.
Ilyce Glink, Publisher
ThinkGlink.com
You would think that folks would prefer to buy over rent especially when rent is so high in most places.
[…] the past year, buying a home became more affordable than renting in 66% of US markets, up from 58% last year. In the markets where renting is still more affordable, […]
My wife and I are thinking about buying a new home this year but we aren’t sure if it’s better than renting. I like that you mention how buying a home is cheaper in the long run because you can build equity. Owning a home eventually is the ultimate goal so we’ll be sure to do this. Thanks for sharing!