Rental Costs, Buying Costs, and Rent vs. Buy
What’s better, renting or buying? If you look at pure numbers, it appears that over the past 5 or 6 years, renters have seen their costs go up while homeowners’ costs went down.
What caused this? Let’s take a look.
Home values fell precipitously since 2007. Those who bought real estate during the period just prior to that time saw their home values plummet.
A wave of foreclosed homes hit the market and homeowners suddenly became renters by the millions.
Soon after 2007, as more and more renters hit the market, rents began to increase.
Today, the housing market is stabilizing. As more homes are sold, renters have fewer places to live. A reduced inventory of homes to lease means rent goes up. That’s what we’re experiencing today.
Renting Costs Compared to Buying
One trend economists follow is called “severe housing costs.” Severe housing costs is a number that compares housing costs and income. A recent report issued by the Center for Housing Policy shows that renters are experiencing a greater housing cost burden compared to those who own.
When housing costs rise by a specific amount compared to household income, these costs fall into the severe housing cost burden category.
The expense driver in this equation is the rent charged each month. As rents rise, housing costs increase. At the same time, when income decreases, the impact of higher rents is more severe. How much so?
The Center for Housing Policy report showed that from the years 2008 to 2011, the most recent period where date was available, renters experienced a 5.9 percent increase in housing costs while owners saw their housing costs fall by 3.2 percent, primarily due to a combination of low home prices and low mortgage rates.
Owners who buy and finance homes today can find their overall housing costs lower than renting while at the same time enjoying an increase in homeowner equity that renters simply don’t have. If a renter can buy, now’s a good time.
Rent vs Buy
Mortgage rates hit historic lows earlier this year but took an unprecedented jump in June, rising more than a full percentage point in a mere week to a level not seen in two years. That kicked a lot of people out of the home buying market who found they could no longer qualify.
So if mortgage rates are a prime factor in owner’s housing costs, will owning still be better than renting?
It might. Higher mortgage rates mean higher payments but let’s step back a second and look at the recent mortgage rate hike. Rates went from the mid three percent range on a 30 year mortgage to the mid four percent range. What were they say three years ago? Four?
In July 2010, the 30 year fixed rate was at 4.56 percent and in 2009, the rate hit 5.22, according to Freddie Mac’s weekly rate survey.
So yes, rates took a big leap from but are still lower than in recent years.
As home prices gradually increase and interest rates make a gradual climb, fewer people will be eligible to qualify for financing. This puts a strain on the rental market and increasing rates further.
Homeowners who buy now will lock in their housing costs with a fixed rate mortgage while renters have no such advantage. You can’t lock in a rental rate other than in the term of a lease agreement.
There’s no doubt that interest rates will ultimately move higher. The only question is when and how high but at each rate increase, both future owners and renters will see their housing costs increase.
Yet the advantage is with the owner, as home equity will offset rising housing costs. Renters don’t have that advantage.