Buying Costs Still Beat Renting, but for How Long?

Despite reports of declining home affordability nationwide, Trulia’s latest data shows purchasing a home still remains more affordable than renting in the largest markets—though the scale is close to tipping in a few.

Mortgage rates would have to climb to 10.6 percent before ownership costs eclipsed rental costs on a national scale, Trulia says in its Winter 2014 Rent vs. Buy Report. The last time rates went that high was nearly 25 years ago, the company points out.

“However, some markets might tip in favor of renting this year if prices continue to outpace and if mortgage rates rise,” Trulia notes. “Given current home prices and rents, Honolulu would tip at 5.0 percent, followed by San Jose and San Francisco [at 5.4 percent and 5.8 percent].”

Freddie Mac’s latest forecast predicts 30-year fixed rates will hover near 5.0 percent by the fourth quarter of this year.

Moreover, the company determined that if prices in each market took an unexpected tumble over the next few years, renting would become cheaper than buying in 37 of the 100 largest metros—by as much as 79 percent in some cases.

“In many markets, the rent-versus-buy decision depends on the one factor you can’t control or perfectly predict: what happens to home prices after you buy,” said Trulia chief economist Jed Kolko. “Sharp price appreciation could make homeownership essentially free, but price declines could mean that renting would have been the better deal in hindsight.

He added: “The current home-price recovery could lull prospective buyers into thinking that future price gains are inevitable, but when doing the rent-versus-buy math, people should prepare for the worst, not just hope for the best.”