Rental Agreements

Is Renting Cheaper Than Buying?

Is now a good time to buy property instead of renting?

Typically, we think of buying property as more expensive than renting with a rental agreement. But in the wake of the housing bubble’s collapse, renting might actually cost more per month than purchasing a home in some areas.  Relatively low mortgage rates and the high demand for renting has led some industry analysts to believe that buying a home is cheaper than renting right now.  

Compared to previous years, average mortgage payments have remained low due to low mortgage rates.  The national average monthly payment on a median sized home was about $600 in 2011, a marked drop since the housing market collapse of 2008.  Additionally, record low mortgage rates reduce interest on the payments, making them overall lower than recent past payments.  Nationally, average 30 FRM rates hovered near 6.1% from 2002 to 2003.  From 2011 to the present, however, these rates hovered at 4%, reaching 3.5% in some areas. 

Rents have risen consistently as well.  In Boston between 2009 and 2012, the average rent for a one bedroom dwelling increased from $1,500 to $2,000.  That’s an increase of 33% in just three years.   

According to one economist, these trends have made buying in many metropolitan areas 40% to 50% cheaper than renting.  This analysis is contingent on several factors however.  The prospective property owners must qualify for a mortgage rate near 3.5%, itemize their federal tax deductions, and qualify to be in the 25% tax schedule.  The economist then calculated what the rent would be for a particular size of for sale property and what the purchase price would be for an identically sized rental unit.  He next factored in extra homeownership costs like property taxes, maintenance, and insurance, as well as renter’s costs like security deposits.  Finally, the analysis assumed the homeowner would live in her house for seven years and then sell it (which is the average length of time homeowners live in one house before moving), and the study added these proceeds to the costs of buying. 

The report concludes that buying is substantially cheaper in all 100 of the largest metropolitan areas in the U.S. provided you meet all of the conditions mentioned.  The smallest differences in buying price versus renting price were still substantial – in Honolulu, Hawaii, buying was estimated to be 28% cheaper than renting, and in New York City the difference is 31%, with an average monthly savings of $499 and $831, respectively.

The greatest differences were in Detroit, Michigan and Gary, Indiana, which featured savings of 70% and 63%, respectively!  In Detroit, a home buyer can expect to pay only $349 per month, whereas a renter would shell out $1,149! 

The report’s conclusions are compelling -- saving $400 to $900 per month while maintaining a similar quality of life would be a great advantage for most people.  Nevertheless, strict underwriting controls keep many peo ple from obtaining mortgages, and down payments are still substantial investments.  

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