For the first time in years, buying a home may beat renting.
Two factors are at play, according to researchers who recently crunched the numbers, Ken Johnson of Florida International University and Eli Beracha of East Carolina University for a paper to be published in Real Estate Economics.
First, rents, though mostly stagnant the past few years, are expected to head higher as more people bitten by the housing bust turn to renting. Rents could rise 7% in each of the next two years, according to Peggy Alford, president of Rent.com.
Second, home prices have finally dropped enough to create a buying opportunity. Nationally, prices are down 32% from their peak, set in 2006.
The net result is that home price gains would need to average only 3.25% annually to beat renting, according to Beracha and Johnson. To make the math work, you have to stay in the home for at least eight years.
Beracha and Johnson compared the cost of owning with the cost of renting.
Renting has usually come out ahead, they say. Buying typically leads to higher monthly and annual bills once all costs are factored in — mortgage payments, property taxes, maintenance and transactional costs.
Those higher costs can be offset if the home gains in value. But renters — the researchers assume — can invest the savings. And that is a big part of why the professors say renting has typically been the better deal. “I was shocked at how often renters won,” said Johnson.
Another reason had been the push to homeownership, which resulted in a premium on home values. “My dad always told me not to ‘throw my money away on rent,'” said Johnson. “This mania toward homeownership tends to drive prices up.”
But that’s changing: Homeownership has dropped to 66.4% from a peak of 69.1% in 2005, according to the Census Bureau.
How much better buying will be depends on location. Of the 23 cities Beracha and Johnson looked at, Seattle is the best place to buy right now. When renters invest in portfolios that include stocks, the appreciation rate required over the next eight years there is 4.84% and the area’s historical average is 6.06%.
For several cities, including New York, Boston and Dallas, renting is still preferable. In New York, for example, homeowners would need a 7% annual rise in home values to beat renters.
Buyers should beware the assumption that home prices will rebound, even from these depressed levels, said Dean Baker, co-director of the Center for Economic and Policy Research.
Hiring has been slow and there are tons of potential foreclosures that could flood the market with distressed homes, depressing prices.
Even in cities where people are, theoretically, better off renting, they may not be in reality. Paying off a mortgage is a forced savings plan, said Baker. The mortgage bill comes in every month, the homeowner pays it and the mortgage balance goes down.
Renters, meanwhile, are just as likely to spend their savings. They’ll wind up with less money than homeowners, which is kind of what your dad was saying all along.