Mortgage Blog

Rent or Buy? The Ultimate Housing Dilemma

Personal Finance

It's the ultimate housing dilemma: "Should I rent or buy?". At some point, every household and family has to grapple with this question.  Sometimes, it is not a financial decision but born more out of need or circumstance.  But for many, financial considerations are paramount in deciding when to buy a home. 

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For much of the economic recovery, it has been decidedly cheaper to own than rent.  However, with the threat of interest rate increases and housing prices soaring, you may be wondering if that is still the case. Trulia recently shared data showing that for families that move every seven years and can afford a 20% downpayment, not only is it much cheaper to own than rent (37.7% cheaper on a national basis), but it’s cheaper than it was last year (37.2%).  Only in 2012 could you get a better deal from owning, when it was a 40.7% bargain.  Additionally, that doesn’t apply to just a few locations or regions; it is a better financial decision to buy in every one of the 100 largest metros.  In some metros it is absurdly cheaper to buy, like in Miami and Fort Lauderdale, FL where it’s 50% cheaper.

Although the trend lines point towards an even more positive ownership environment, there is reason to think the pendulum could begin to shift back the other way.  While many prospective homeowners focus on the ups and downs of interest rates, researchers at Trulia argue that you should be much more concerned about home prices instead.  Put simply, mortgage rates would have to more than double (unlikely, barring some major change in monetary policy) to make renting a better deal, but prices would have to increase by only 67% (nationally).  While that may seem high, in some markets, it’s much closer than that.  For instance, in San Jose, CA, home prices need only rise another 24% for renting to make homeownership more expensive, while rates would have to rise 45% (1.6 points).

The Bottom Line: It is still a much better deal (financially) to buy than to rent, and though that is unlikely to change in the near future, potential homebuyers should keep a closer eye on home prices than on interest rates, as prices are much more likely to change the equation. 

For more on this topic, check out 'Rent vs. Buy: Be Haunted by Prices, Not Rates' on Trulia.

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