On your path to homeownership, you may be unsure when it makes the most financial sense to take the plunge. Monthly mortgage payments can sometimes be more expensive than rent prices, and there are additional costs associated with owning a home. While that is all true, experts have found that the tipping point for buying to become more affordable than renting is actually much lower than many people think.
Research conducted in August 2021 by First American Title Company found that owning a home was cheaper than renting in all of the top 50 U.S. markets. With home prices last year, that conclusion might seem counterintuitive, but it is precisely because of that home price growth that owning was a better deal. That is because homeownership has the benefit of earning equity, so those who bought in 2021 typically made money on their investment right away, balancing the cost of the mortgage, insurance, and maintenance.
Here's an example from First American to illustrate the tipping point for owning over renting. Say a potential first-time homebuyer living in Houston can either continue renting at the median monthly rate – roughly $1,260 - or can purchase a home at the 25th price percentile for the area - $245,000. If the buyer can get a mortgage loan at 5%, they would end up paying $1,250 a month in mortgage principal and interest, as well as another $760 in taxes, homeowner’s insurance, private mortgage insurance, and home repairs. That all comes up to $2,010 per month as a homeowner versus $1,260 for staying a renter.
At first glance, it doesn’t seem to make sense at all to buy a home, when it will cost $750 more each month. However, the picture totally changes when equity gets factored in. Home prices have risen 16% in Houston over the past year, meaning if a borrower bought at the beginning of the year, and the appreciation rate stayed the same, by the end 2022, they might realize roughly $39,200 in added home wealth. That money could be accessed through a home equity loan or line of credit or by selling or the owner could just hold onto it and continue to let the equity grow.
Of course, home price growth has slowed somewhat this year and may continue to slow as the markets adjust to higher inflation, but even if home prices increased by just 3.7%, it would make more sense to buy than continue renting. At that rate, the buyer would gain $9,000 in equity over a year, the same amount of savings gained from continuing to rent. And that’s assuming the rental price would stay the same. Reports show that as of August 2022, the average rent for a one-bedroom apartment in Houston was $1,310, a 20% increase over the previous year, meaning further rent increases are likely for the near future.
According to all the data, the tipping point for buying over renting is actually quite low. Home prices only need to be growing at a minimal rate for the financial benefits of owning to outweigh staying in a rental.
Location does matter, however. Buyers in smaller, more affordable markets have a lower tipping point, where high-cost coastal areas like New York and Los Angeles would need to experience much higher price growth rates to provide enough equity gains to outpace rental savings.
If you're thinking about buying a new home, please give us a call so that we can help you become pre-approved for your next mortgage loan.
These materials are not from HUD or FHA and were not approved by HUD or a government agency.