Nationally, buying makes more sense than renting, though the lead is shrinking.
In mid-2018, buying a home nationally is 26% cheaper than renting an equivalent home, according to Trulia. This is down from 36% a year earlier and 41% in mid-2016.
The decline is due to home prices rising faster than rents. In California, home prices have increased much faster than rents. In fact, in some California metros, renting is actually less expensive than buying an equivalent home.
For instance, in San Jose, the average home price has increase 29% year-over-year, while rents have remained essentially flat. Likewise, home prices rose 14% in San Francisco from last year, while rents actually dropped 3%.
In these high-cost areas of the state, it has become cheaper to rent than buy by:
- 12% in San Jose; and
- 6% in San Francisco.
In other parts of the state, buying is still significantly cheaper than renting an equivalent home.
But it’s important to remember these figures don’t hold true for each potential homebuyer. Trulia assumes each buyer will:
- own the home for seven years;
- put down a 20% down payment (a tall order for any first-time homebuyer — who is basically the only type of potential homebuyer who might consider renting instead of buying);
- pay a 1% interest rate (which is now quite low, as interest rates continue to march higher in 2018); and
- pay continuous ownership costs, including maintenance, property taxes and homeowners insurance.
Trulia also assumes rents and home prices will rise over the next seven years at a 2.2% annual rate.
Buy or rent? Show them the savings.
The calculus a potential first-time homebuyer performs when deciding whether to continue renting or make the leap into homeownership is complicated.
A number of factors go into this decision, most importantly:
- how long they plan on living in the area;
- how much they have saved for a down payment; and
- whether they can qualify to purchase the type of home they want with their current income and credit history.
Following the answer to those three questions, to find out whether buying or renting is the best financial choice, there is some math involved, which most homebuyers (and sellers… and real estate agents…) shy away from.
To make it easier, have potential homebuyers fill out their personal Buy-Versus-Rent After-Tax Analysis to calculate the actual savings and costs buying versus renting will produce. [See RPI Form 320-4]
Many current renters have no idea about the financial benefits of homeownership, including tax deductions and equity buildup. Therefore, showing them these benefits may move them off the fence and into their first home search.
Finally, there is no substitute for the pride of ownership produced by purchasing a home. It’s unlikely a potential first-time homebuyer needs reminding of this particular benefit, but they very likely need help grasping the financial aspects of homeownership.
Real estate agents: What are the reasons your first-time homebuyer clients are looking to buy? Is it due to pride or ownership, or are they buying mainly for the financial benefits? Share your experiences in the comments below!
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