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.
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%.
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".
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.
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.
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.