From the WSJ:
Buying a home has long been part of the American dream. But rising prices have made renting less expensive in many places.
People often aspire to own a home for reasons that have little to do with money, and rental options are limited in some communities. Yet owning property can limit your flexibility to move when you want and ties up a lot of your money.
The monthly cost of renting was lower than buying in 20 large metropolitan areas at the end of last year, the most recent period for which data are available, according to figures provided exclusively to The Wall Street Journal by Deutsche Bank. That is up from 15 large metropolitan areas a year earlier.
The bank calculates the costs in 54 markets based on average local rents and median home-sale prices, which it uses to estimate monthly mortgage payments for a hypothetical buyer in the 25% federal income-tax bracket.
Renting had been less expensive than buying on average across all the areas Deutsche Bank tracks since at least the early 1990s. But that changed during the financial crisis, as home prices plummeted and interest rates on mortgages dropped. The current rally in home prices appears to be pushing the housing market back toward the historical norm.
Many Americans see buying a home as an essential step in a successful life, and owning one can bring significant financial benefits.
The most obvious upside is that a home can significantly increase in value. The median sales price of existing single-family homes rose 81% from 1993 through 2013, according to the NAR.
The potential payoff can loom large in a buyer’s mind when home prices are going up rapidly, as they have recently. “We’ve already seen six to seven years of normal appreciation in the last 12 months” in many markets, says Jack McCabe, an independent housing analyst in Deerfield Beach, Fla.
Many homeowners also can deduct mortgage interest from their income-tax bills along the way.
Given the wide array of potential benefits, homeowners are sometimes surprised to learn that buying isn’t always the smartest financial option.
To begin with, the monthly cost of renting can be lower, even for a home of similar size and quality in the same community.
Renters, for example, don’t pay property taxes, homeowner’s insurance and, in most cases, maintenance costs. These expenses can cost homeowners about 3% of the price of their home annually, experts say.
While those costs can be folded into monthly rent, apartment renters often pay a smaller share as landlords spread the costs among many tenants, says Stijn Van Nieuwerburgh, director of the Center for Real Estate Finance Research at New York University. If a window breaks or the toilet plugs up, your landlord—not you—pays for the repairs.
To calculate whether buying or renting makes more sense financially, you need to have a sense of your monthly costs in each case, including rent, mortgage payments, taxes, insurance and other related expenses that may apply to each option—as well as whether you would be more likely to spend or invest any savings from renting.
The verdict could differ considerably within a city, suburb or town, based on the location and the style and size of the homes you are exploring.
The Deutsche Bank data reflect an attempt to do that math across metropolitan areas, and essentially function as a general guide to each market.
Would-be buyers should proceed carefully. First, they should try to get a sense of how hot the local real-estate market is and whether buyers generally still have the upper hand, which is often the case far from the coasts and outside large cities.