Answer this question: In this current real estate market, is it worth it to buy a home, or is renting more cost-efficient?
Buying a home has different benefits and drawbacks depending on where you are in your journey. Let’s look at the data, and hopefully, it helps you make an informed decision.
You should check out this article from the Wall Street Journal. It’s titled “Is It Better to Rent or Buy? What to Do in a Hot Housing Market,” and I love how it goes into detail about the statistics they present.
It starts with a graph of rent and home prices of different metros from 2019 to February 2022. It compares the single-family rent index and home price index data from CoreLogic.
There are two things I will look for here:
I’m looking for areas that are going to give me a return on my investment if I’m going to rent.
This article is by Will Parker and Nate Rattner, and I think they did a great job.
According to WSJ, “home buyers will need to wait longer for their investments to pay off than they would have before the pandemic.”
If you are in the market looking to buy real estate, consider how long you will be staying in that home, because that will dictate if buying a home is going to be worth it.
“For this analysis, breaking even is when the estimated net costs of having owned that home match the estimated costs of having rented a typical home over the same period,” the article says.
And, since the housing market is on-demand, “a hot housing market has increased the time it takes to break even on the upfront costs of buying a home, after which owning becomes a better financial choice than renting,” according to WSJ.
They presented a graph titled “Years it takes to break even on a median-price home purchase, before the pandemic vs. now.” For most metros on the graph, it takes more years to reach the breakeven point now, than before the pandemic, except for Miami, which is an outlier market.
“In Austin, Texas, for example, a person buying a median-priced home and putting 10% cash down with a 30-year, 5% fixed-rate mortgage, wouldn’t be able to sell the home and break-even for an estimated 5.6 years. That’s up from 3.7 years to break even before the pandemic when compared with the cost of renting over the same period. In Miami, an outlier market where asking rents have risen faster than home prices, it will take less time to break even, moving down from 2.5 years before the pandemic to 2.3 years now,” according to WSJ.
Also, the article says, “The math looks a lot better for homeowners on the other side of the break-even point, however. After eight years of owning in Austin, the buyer at the time of sale would be up to $30,000, compared with renting; after 10 years, $55,000; and after 15 years, nearly $140,000.”
Now, here are a few things I want you to know.
Remember that you need to stay in a home for at least two years if you don’t want to pay some taxes. So, if you are buying a house as your primary residence, and you think you might sell it in less than two years because prices went up so much, maybe you should reconsider. The tax you’ll be paying for a primary residence if you are single is $250,000, and if married, $500,000.
Also, remember that real estate is cyclical and regional. The longer you stay in a home, the more it pays off because you are playing into the cyclical game. According to studies from First American, Redfin, and NAR, the average number of years people stay in their homes is now up 13 years because of the pandemic.
And if you check this graph, it shows the financial cost and benefit to buyers if they sell after a certain number of years, and the number of years it takes to break even.
These are some of the data you need to look for when deciding on whether to buy real estate in an area or not.
“The 10% down payment, which Tomo says is typical of its users, is higher than what many first-time buyers look to pay, especially those who take advantage of Federal Housing Administration financing that allows down payments of as low as 3.5%,” says WSJ.
Here’s the concern though. As prices go up (and it doesn’t seem to be coming down any time soon), and consumers need to pay a little more because of higher interest rates, if anything breaks [in the home] this is what would most likely happen:
“‘If you’re suddenly looking at 40% of your monthly income going into your home payment, and we have inflation at 8.5%…you’re one water heater away from missing a mortgage payment,’ said Rick Sharga, executive vice president of market intelligence at housing research company Attom Data Solutions,” according to the WSJ article.
That’s a little scary, and that’s the thing you have to think of before buying a home.
If you plan to stay there long-term, buying a home is more profitable for you the longer you stay there. I’m talking more than 5.7 to 13 years.
However, “a 30% increase in the rent this past fall was a major motivator in what became a monthslong hunt for a home to buy,” according to WSJ.
A few weeks ago, Fortune released an article called “This is not the 2008 housing bubble all over again—but a little-known metric can tell us when the next crash is coming.”
And this is what it says: “The problem comes when prices get out of line with rents, jumping so high that families can lease similar properties at monthly payments much lower than what they’d shoulder as owners.”
Pinto says, according to that article, that the interplay between rent and home prices is something like this: when houses get too expensive compared to rental properties, more people choose to rent. This raises rental prices [due to demand] and lowers home prices until it reaches a balance.
That’s what we have to pay attention to. The WSJ article is so important because it shows us the breakeven point for owners.
Now, when we ask ourselves “is it better to rent or to buy?” you can make an informed decision about whether it is worth it or not.
