Buying beats renting until interest rates hit 10.5%

A new analysis by Trulia finds that rates can rise substantially before renting becomes a better deal. But the numbers vary by city – and by individual.

By Teresa at MSN Real Estate Jun 12, 2013 1:42PM

Home and stack of money on a scale. (© Diane Macdonald/Getty Images)Home mortgage rates are beginning to rise, and that’s causing great anxiety among some would-be homebuyers who can’t find a home to buy.

 

According to a new analysis from the real-estate portal Trulia, interest rates could rise to 10.5%  nationally before renting would become a cheaper option than buying.

 

The numbers vary by city, of course. An interest rate of 5.2% tips the scales in favor of renting in San Jose, Calif., while buying would make sense in Detroit until interest rates rose to a whopping 35.8%.

 

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Interest rates have begun to rise, from 3.4% to 3.9% in the past month. Rising rates, coupled with rising prices, mean that the cost of owning a home is getting more expensive. But interest rates have a long way to go before renting beats buying, at least from a statistical standpoint.

"Rates are now on the rise and are likely to keep rising, thanks to the strengthening economy and the Fed eventually trying less hard to keep rates low. But it will take big rate increases to turn off prospective homebuyers," Jed Kolko, Trulia’s chief economist, wrote at the Trulia Trends blog. "At today’s prices and rents, rates would have to rise to levels we haven’t seen in 20 years before renting is cheaper than buying a home on average across the country."

If you’ve been around for a while, interest rates below 5% still sound like an incredible bargain. The rate was about 12% when I bought my first house in 1983. A few years later, I bought a house from a couple who were paying 17% interest with negative amortization. When I was able to refinance that 12% interest rate to 8%, I thought I was getting a great bargain.

But just because rising rates won’t sink the housing market or make renting a statistically better deal, it doesn’t mean that the rates won’t change your personal calculations. If you’re buying a $200,000 house with 20% down, your payment on a $160,000 mortgage – not including taxes and insurance – is more than twice as much with an interest rate of 10.5% as it is with an interest rate of 3.4%.

 

For comparison purposes, here are monthly payments on a $160,000, 30-year, fixed-rate mortgage at various interest rates:

  • 3.4%: $709.57
  • 3.9%: $754.67
  • 5%: $858.91
  • 10.5%: $1,463.68
  • 12%. $1,645.78

So while the "tipping point" for buying versus renting in national statistics may be a 10.5% interest rate, your tipping point could be much lower.

 

Using Trulia’s analysis of the 10 largest metro areas, the cities with the lowest tipping point and the interest rate at which renting would make more sense are:

  • San Jose: 5.2%
  • San Francisco: 5.4%
  • Honolulu: 5.8%
  • New York: 6.8%
  • Orange County, Calif.: 6.8%

Those are followed by five other California metros: Los Angeles, San Diego, Ventura County, Sacramento and Oakland, with tipping points ranging from 7.5% to 8.2%.

 

The cities where interest rates would have to reach the highest points before renting is cheaper and the rates it would take are:

  • Detroit: 35.8%
  • Memphis, Tenn.: 21%
  • Gary, Ind.: 20.8%
  • Warren-Troy-Farmington Hills, Mich.: 20.2%
  • Toledo, Ohio: 20.1%

They are followed by Cleveland; Dayton, Ohio; Grand Rapids, Mich.; Akron, Ohio; and Kansas City, Mo.-Kan., with rates ranging from 16.9% to 20%.

 
86Comments
Aug 3, 2013 5:37PM
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If you buy a home for 250K and keep it 30 years you'll owe nothing and own a home probably worth more in inflation adjusted dollars than what you paid. Maybe you can rent with payments a few hundred less a month and you could come out ahead by investing the same amount but in reality you'll probably just spend it. Better to have nothing in 30 years and continue to pay rent or be free of it in 30 years with an opportunity to sell and move to a more modest home in a low cost area using the profit to subsidize retirement?  Easy call for me.
Aug 3, 2013 10:35AM
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 "Best to buy or rent" ? It depends" ! That goes without saying , of course it depends . I think you wrote an article similar to this a little while ago Teresa . You've got to get a little more creative , my dear . The only real advantage between renting , and owning , is the amount of privacy you're afforded . The article is redundant .
Aug 3, 2013 8:53AM
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I am not happy with these common calculations for rent vs buying.  When looking at the monthly/annual cost of owning a home, if you are comparing it to renting, you MUST also include property tax and maintenance.

Take the example of the $160k home at 3.4%.  Monthly payment just for the mortage is $710 (roughly).  Say property tax is $3000 per year, you need another $250.  Insurance will probably cost at least $900, so that's another $75 per month.  Assume yearly maintenance comes to 1% of home value, then we need another $160.  This brings us to a true monthly cost of $1195.  So if your rent is above that, then yes it is more expensive than owning.  The $710 value doesn't even come close to covering the entire cost, not even 60%!

There is no shame in renting if it is the best option based on an individual's circumstances.
Aug 3, 2013 8:39AM
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That's right folks.  It's good to be enslaved by debt.
Jul 30, 2013 7:03AM
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I found pretty good e-book on amazon that has info about buying a house.  No fluff.  It has info on how to find out what you should be able to spend for a home rather that what a real estate agent or mortgage broker can get you "approved" for.  Its called "Stuff I told my kids about..how to buy your first house".

Jul 25, 2013 5:27AM
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Renting is far better and less riskier than buying.
Jul 24, 2013 3:52AM
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No matter whether you rent or buy....someone will pay the cost of taxs, insurance, maintanance and the variety of associated costs.  So, no landlord is going to throw in the odd costs they pay

for your convience.  Trulia isn't saying anything about places like Merced, Ca, Reno, Nv, and

most of Florida.  For several years that is most of what they have talk about.

Jul 7, 2013 1:52AM
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It's really not that shocking that some folks prefer you waste money renting instead of buying a home and building equity. Those folks don't want you to achieve the American dream.
Jul 2, 2013 10:11PM
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First of all, why even buy a home where jobs are scare and or the commute to your job is long? If you do that today, that's a you problem. So if you plan to stay in a location for a long time, consider it's growth potential before renting or buying a home. Once you have a locale that's at the very least stable and has potential job growth, you buy when the plan is to stay on a long term basis and rent if you are just there for a hot minute. Folks complaining about additional costs seem to not have considered this fact. Rent is never locked in and will rise over time. A fixed rate mortgage is locked in over time. That fact alone knocks major holes in some folk's theory of owning versus renting. Furthermore, you can gain Equity in a home while you don't get Jack from renting. You can borrow against your home, rent out a ROOM, you really can't do much with a limited space Rental. Security of a Home versus the security of a rental. Space of home versus the space of a rental. Buying versus rental, at current rates, the choice is crystal clear. If you have the money, Buy, Buy, Buy. Buy. End of story.
Jun 29, 2013 9:52AM
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This analysis (AKA spin) is done by Trulia. They make money from people buying realestate rather than renting it.

 Is it a suprise that they find buying beats renting?

As others point out, many of the cost's of owning are not factored in.

 

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yeah, but property taxes, homeowner association fees, and the cost of maintenance of appliciances, the yard, etc isn't factored into this equation. so this comparision has little value.
Jun 23, 2013 8:31PM
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Am guessing they don't really take into account the total transaction costs of 8% - 10% to buy + sell a home.
Jun 23, 2013 6:10PM
Jun 23, 2013 5:52PM
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The key to home ownership is the 'ownership' part.  That is, to have the house paid off. 

I don't think you'll ever find someone who owns their home outright tell you that they would be better off renting. 

That is the goal - to have your house paid off as soon as possible.  The earlier you pay it off, the more years you can enjoy living rent and mortgage free.
Jun 23, 2013 5:41PM
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Next time, save your money and pay cash you morons. Americans are the dumbest phuckers on the planet.
Jun 23, 2013 4:46PM
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maybe, maybe not.  as anyone who has ever owned a home knows, the monthly mortgage payment doesn't include money for repairs to the home, upkeep (suggested is maybe 2-3%/yr of home's value), may or may not include cost of home owner's insurance or property taxes.  if you want to move, it's not always so easy to sell the house (been there, done that twice) and you are seriously stuck...unless you have unlimited funds to pay 2 mortgages.  of course you could rent out the house you are trying to sell until it does sell, but then you run the risk of renters causing a great deal of damage to your property (been there, done that) which makes it even harder to sell.  if you do decide to own, make sure you buy flood insurance -
Jun 23, 2013 4:36PM
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Owning  a home is expensive if you consider all the money it takes to maintain and add that to your mortgage payments, the only time owning is better is if your in an inflationary market. Mortgage is a small part of costs, add the other factors and look at what you buy when you own a home, if you maintain your home, its spendy..
Jun 23, 2013 4:02PM
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Buying beats renting? It depends.

Forget for a minute  the very bias NAR analysis (they were calling the bottom on housing since early 2009 if you remember their TV. Commercials)
Provided you understand real state and economic cycles you can safely answer yes, but the US. Economy entered the twilight zone in 2008 and this not a normal economic cycle. So if you buy right now 06/13 the odds are high that renting and buying at any interest will be the same for the next six years or so because once this price levitation in housing ends probably by the end of this year, prices will go back to 2012 levels in most areas because there is no increase on salaries/wages  nor jobs to support increasingly higher prices in housing,  and then prices will probably remain flat for a few years as was the case in the late 1990 after that housing bubble had collapsed.

Basically don't chase price near the top when the banksters are hiding their shadow inventory like great poker players waiting for the next bag holder.

Better prices will come next year.



Jun 23, 2013 3:58PM
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We owned 2 homes...Our first home was the one we saved for for 10 years....we loved it and we poured our heart and soul into it...it was a 120 yr old victorian farmhouse in a little town up in CT...we bought low and had tons of work ahead restoring it but it was our safe place, our place to raise our kids.  It was an investment that paid us back in spades.     But sadly the day came when we had to realize the place was going to be too much for us to handle and we chose to move south with our youngest children...we bought a brand new just built home, needed nothing...but after 15 years the place started to have all sorts of major problems( foundation cracks, copper pies with pin hole leaks...central ac that wasn't worth the $$  and then the housing bubble burst and hit the area we lived in the hardest...suddenly our "home" became a nightmare...all the homes in the areas values dropped like stones. We watched our equity dissolve away and then got the word our home wasn't worth 1/2 what we paid for it 16 yrs prior.....all our investment was GONE!  We now rent, we started with a very small place for 18 months(the kids were all gone) and then moved into a small house, with a garage, a lovely yard, easy access to shopping and entertainment. If anything goes wrong the landlord fixes it. We are able to sleep at night, have time for ourselves and really have no desire to be tied to a money pit again. The American dream is just that ....a dream...there are very few who make it to the final payment of a mortgage...

Jun 23, 2013 3:58PM
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Our house is paid off since last June 2012, but when we first got out mortgage, interest rates were 7.4% for a 30 Yr., mortgage.  After two years, we refinanced it at 5.5% for 15 yrs.  We bought our house in 2001 in the Peoria, AZ area.
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