Buzz
While it's commonly believed that buying a home is always the better financial move, the truth is more complex. Several factors play a role, and in some cases, homes don’t appreciate as much as anticipated. Real estate expert John Burns has even calculated how much more it costs to buy a home compared to renting in 21 U.S. cities.
Many assume that purchasing a home is the most financially sound decision, but that belief is based on a few uncertain assumptions. For instance, future property appreciation is often factored into the equation, but as Burns points out:
Data shows that home prices have historically appreciated 1%–2% faster than incomes, but this trend has occurred during a 30-year period of declining mortgage rates. If you believe rates will rise or at least remain stable, it might be overly optimistic to assume the same level of appreciation.
However, owning your home after paying off the mortgage is undeniably an asset, even if the property doesn't appreciate. That’s certainly more than what you’d have with renting. But remember, you must also consider the opportunity cost of your mortgage payments. If the difference between rent and mortgage payments is significant, you might invest that money and actually see higher returns over time than your home’s appreciation. This isn’t true in all cases, but it’s more likely in certain markets. Take San Francisco, for example: while rent is high, your mortgage payment could be astronomical.
To illustrate the difference in monthly costs between purchasing and renting, Burns created an insightful map showing this variation in 21 major markets. He shares:
Below is a chart that highlights major U.S. markets and the premium of buying versus renting, as seen from the perspective of most first-time buyers. The assumption is that you’re comparing renting an apartment in a large complex with purchasing a home valued at 80% of the median home price (a typical scenario for first-time buyers) using a 95% LTV loan.
These figures reflect the average market conditions for each city or metro area. They also assume a 5 percent down payment, which is quite low. Naturally, the more money you put down on your home, the lower your monthly payments will be. Nonetheless, this data provides a general snapshot of home prices in these cities. For a more personalized calculation of whether renting or buying is right for you, the New York Times offers an excellent, detailed calculator worth checking out.
Take a look at the graphic in the link below, then visit the original post for more details.
Photo by DJ Crazy Gabe.
