Rising Mortgage Rates Narrowing Buy vs. Rent Gap

Source: Zillow.com  Author: Jed Kolko, Chief Economist

Despite higher mortgage rates, buying is still 35% cheaper than renting in all of the 100 largest metros, but San Jose, San Francisco, and Honolulu are on the verge of tipping.

Homeownership remains cheaper than renting nationally and in all of the 100 largest metro areas. But rising mortgage rates have narrowed the gap between the cost of buying and the cost of renting. The 30-year fixed rate is now 4.80%, compared with 3.75% one year ago (according to the Mortgage Bankers Association, or MBA). This jump in rates has raised the cost of buying relative to renting. As a result, buying is 35% cheaper than renting today, versus being 45% cheaper than renting one year ago.

How can buying be so much cheaper than renting when home prices andmortgage rates are both climbing? The key reason: both rates and prices are rising from very low levels and are still below their long-term historical norms. But the rent versus buy math depends on your local market, as rising rates and prices have pushed a handful of metros very close to the tipping point when renting becomes cheaper.

Before going further into the data, here’s how we do the math. To calculate whether renting or buying a home costs less, we take the following steps:

1. Calculate the average rent and for-sale price for an identical set of properties. For this report we looked at all the homes listed on Trulia for sale and for rent from June to August 2013. We estimate prices and rents for similar homes in similar neighborhoods in order get a direct apples-to-apples comparison. We are NOT just comparing the average rent and average price of homes on the market, which would be misleading because rental and for-sale properties are very different: most importantly, for-sale homes are roughly 50% bigger, on average, than rentals.
2. Calculate the initial total monthly costs of owning and renting, including maintenance, insurance, and taxes.
3. Calculate the future total monthly costs of owning and renting, taking into account price and rent appreciation as well as inflation.
4. Factor in one-time costs and proceeds, like closing costs, downpayment, sales proceeds, and security deposits.
5. Calculate the net present value to account for opportunity cost of money.

To compare the costs of owning and renting, we assume people get a 4.8% mortgage rate on a 30-year fixed-rate loan with 20% down; itemize their federal tax deductions and are in the 25% tax bracket; and will stay in their home for seven years. Under these assumptions, buying is 35% cheaper than renting nationwide, taking into account all of the costs and proceeds from buying or renting over the entire seven-year period. We also look at alternative scenarios by changing the mortgage rate, the income tax bracket for tax deductions, and the number of years that one stays in the home.  The full methodology is available here.

Our interactive Rent vs. Buy Map shows how the math changes under alternative assumptions. And if you’re interested, check out our detailed methodology which explains our entire approach step-by-step.

Best of all: today we launched our new Rent vs. Buy Calculator, which lets you compare the cost of renting and buying based on whatever assumptions, prices, rents, and scenarios you like, using the same math that powers our interactive map and this report. Check it out and find out what’s the cheaper option for you.

San Francisco Bay Area Close to Tipping in Favor of RentingBuying a home is cheaper than renting in all of the 100 largest metro areas, but buying ranges from being 65% cheaper in Detroit to just 4% cheaper in San Jose. In fact, owning is now cheaper by just 10% or less in San Jose, San Francisco, and Honolulu – that’s a big change from one year ago, when buying was 24% cheaper than renting in Honolulu, 28% in San Francisco, and 31% in San Jose. Even in markets with minimal year-over-year price increases, buying today isn’t as great of a deal versus renting compared with last year. For example, home prices rose just 1.7% year-over-year in Philadelphia, but buying is now 40% cheaper than renting compared to being 46% cheaper one year ago.

The biggest factor narrowing the gap between the cost of buying and the cost of renting is rising mortgage rates – which affect the entire country. In fact, the benefit of buying relative to renting shrank in nearly all of the 100 largest metros over the past year: only in Springfield, MA did the gap widen, from buying being 47% cheaper than renting last year to being 49% cheaper than renting today. Nationally, rising mortgage rates account for about 8 points of the 10-point shift from buying being 45% cheaper than renting one year ago to being 35% cheaper now. The other 2 points are due to prices rising faster than rents. (How did we figure that out? If you used today’s prices and rents in the rent vs. buy calculation but used a 3.5% mortgage instead of a 4.8% mortgage, buying would be 43% cheaper than renting – 2 points less than last year.)

Because fluctuating mortgage rates can affect the rent versus buy math, we identified the mortgage rate “tipping point” at which renting becomes cheaper than buying, given current prices and rents. If rates keep rising, San Jose will tip first in favor of renting, at 5.2%. Already today, at 4.8%, buying is just 4% cheaper than renting in San Jose. The tipping point is below 6% in San Francisco and Honolulu as well, and below 8% in New York, Los Angeles, and seven other major metros. Nationally, the mortgage rate tipping point is 10.5%, and it’s 20% or higher in Detroit, Gary, and Cleveland.

Where Buying a Home is a Tougher Call
#	U.S. Metro	Cost of Buying vs. Renting (%),Summer 2013	Cost of Buying vs. Renting (%),Summer 2012	Mortgage Rate Tipping Point When Renting Becomes Cheaper Than Buying, Summer 2013
1	San Jose, CA	-4%	-31%	5.2%
2	San Francisco, CA	-9%	-28%	5.7%
3	Honolulu, HI	-10%	-24%	5.8%
4	Orange County, CA	-20%	-34%	7.0%
5	New York, NY-NJ	-21%	-31%	7.5%
6	San Diego, CA	-21%	-34%	7.3%
7	Los Angeles, CA	-21%	-32%	7.3%
8	Ventura County, CA	-22%	-33%	7.5%
9	Oakland, CA	-23%	-43%	7.5%
10	Sacramento, CA	-26%	-39%	8.2%

Where Buying a Home is a No-Brainer
#	U.S. Metro	Cost of Buying vs. Renting (%), Summer 2013	Cost of Buying vs. Renting (%), Summer 2012	Mortgage Rate Tipping Point When Renting Becomes Cheaper Than Buying, Summer 2013
1	Detroit, MI	-65%	-70%	32.8%
2	Gary, IN	-58%	-63%	20.6%
3	Memphis, TN-MS-AR	-55%	-61%	19.0%
4	Cleveland, OH	-54%	-60%	20.0%
5	Kansas City, MO-KS	-53%	-57%	18.0%
6	Warren-Troy-Farmington Hills, MI	-53%	-61%	18.4%
7	Dayton, OH	-53%	-61%	19.5%
8	Grand Rapids, MI	-52%	-57%	17.7%
9	West Palm Beach, FL	-52%	-59%	17.1%
10	Akron, OH	-51%	-55%	18.2%

Note: Negative numbers indicate that buying costs less than renting. For example, buying a home in Detroit is 65% cheaper than renting in 2013. Trulia’s rent vs. buy calculation assumes a 4.8% 30-year fixed-rate mortgage, 20% down, itemizing tax deductions at the 25% bracket, and 7 years in the home. Click here to download the full Rent vs. buy cost considerations for the 100 largest U.S. metros: (PDF) or (Excel)

How the Tax Deduction Shifts the Rent vs Buy MathA key factor affecting the rent-versus-buy math is whether you itemize deductions on your income taxes and what tax bracket you’re in. If you itemize, you can deduct mortgage interest payments (not principal payments) and property tax payments from your income before calculating how much you owe in taxes. You can deduct other things, too, like state and local taxes, charitable contributions, and more, though only 33% of taxfilers choose to itemize. Itemizing lowers the cost of buying relative to renting – especially if you pay taxes at a higher rate, because that means you’re deducting more. (By the way, we assume that you either itemize or you don’t, and then do the rent-versus-buy math. If you would itemize as a homeowner but wouldn’t as a renter, then the rent-versus-buy math is a little different – it falls between the itemizing and not-itemizing scenarios.)

Itemizing deductions has also been a hot issue in Washington, taking center stage for a moment in last year’s presidential campaign, and scaling back these deductions could become part of future federal budget negotiations. Let’s use our rent-versus-buy math to help sort out the impact of itemizing.

Itemizing lowers the cost of buying versus renting, but buying remains cheaper than renting almost everywhere even if you don’t itemize. Without itemizing – or if your tax situation means you get no benefit at all from itemizing – buying looks 22% cheaper than renting nationally. And buying still beats renting in 97 of the 100 largest metros – everywhere but San Jose, San Francisco, and Honolulu. Also, the mortgage rate tipping point falls to 7.5% if you don’t itemize, which is a lot lower than 10.5% but a lot higher than today’s 4.8%. The last time the 30-year fixed rate was 7.5% or higher was 13 years ago.

	Itemize at 25% (baseline assumption)	Do not itemize
Cost of buying versus renting nationally	-35%	-22%
Metros out of 100 where buying cheaper than renting	100	97
What is the national mortgage rate “tipping point”	10.5%	7.5%

What Does It Mean for You?
Our analysis shows you whether buying is cheaper than renting on average nationwide and in the 100 largest metros. Our interactive Rent vs. Buy Map lets you explore how the math changes at different mortgage rates, different itemizing assumptions, and for different number of years of staying in your home. These are critical factors. Since we haven’t mentioned why how long you stay in your home matters, let’s review that. Staying put longer lowers the relative cost of owning for two reasons: (1) when you stay put longer, you spread the upfront and final closing costs over more years, and (2) staying longer typically gives you more home-price appreciation. Nationally, buying is 35% cheaper than renting if you stay put for 7 years, which is our baseline assumption. It falls to 27% for 5 years, and just 8% for 3 years.

It’s not hard to come up with plausible scenarios where renting beats buying. But see for yourself: our Rent vs. Buy Calculator lets you choose any mortgage rate, tax bracket, and length of time you stay in your home. It also lets you change all of the other assumptions. For instance: we assume you’ll pay 1% of the value of your home each year on renovations and maintenance, but feel free to make that much higher if you redo your kitchen every year or much lower if you think a leaky roof is just part of a home’s charm. If you live in a flood zone, use a much higher annual insurance cost than our baseline assumption (check our natural hazard maps to see if your dream home is in a flood zone); and if you think your home value will rise 10% per year forever, well, you’re wrong, but feel free to see what difference it would make.

Finally, don’t forget that the decision about renting versus buying is not just about the numbers. Each has its advantages. Buying gives you more control over your home, but renting gives you more flexibility. Each even has different financial benefits. Buying can, in effect, help you force yourself to save, but renting could let you invest your savings in a more diverse set of assets than a single house. Still, knowing the numbers is the right place to start.

The Post-Crash Rebound, Not Job Growth, Drove 2013 Price Gains

Source: Trulia.com  Author: Jed Kolko, Chief Economist

In 2013, the housing markets with the biggest increases in asking prices were all rebounding from severe price drops in the housing bust. Home prices are still in rebound mode, but this effect will weaken in 2014. Job growth, in contrast, mattered little for price gains in 2013 but helped drive rent increases.

The Trulia Price Monitor and the Trulia Rent Monitor are the earliest leading indicators of how asking prices and rents are trending nationally and locally. They adjust for the changing mix of listed homes and therefore show what’s really happening to asking prices and rents. Because asking prices lead sales prices by approximately two or more months, the Monitors reveal trends before other price indexes do. With that, here’s the scoop on where prices and rents are headed.

Asking Prices Up 11.9% Y-o-Y in December, Slower Than in NovemberIn December, the year-over-year increase in asking home prices slowed for the first time since the price recovery began in early 2012: prices rose 11.9% year-over-year in December, compared with November’s 12.2% year-over-year increase. Asking prices rose 0.4% month-over-month, seasonally adjusted, the third straight month of gains less than 1%.

Quarter-over-quarter, prices rose 2.6% seasonally adjusted, which is also a slowdown from previous months. Quarter-over-quarter asking prices rose in 83 of the 100 largest metros and fell in 17, which is the most metros with quarter-over-quarter price declines in 10 months.

December 2013 Trulia Price Monitor Summary
	% change in asking prices	# of 100 largest metros with asking-price increases	% change in asking prices,excluding foreclosures
Month-over-month, seasonally adjusted	0.4%	Not reported	-0.5%
Quarter-over-quarter, seasonally adjusted	2.6%	83	1.6%
Year-over-year	11.9%	98	11.3%
*Month-over-month change is December versus November. Quarter-over-quarter and year-over-year changes are three-month averages. Data from previous months are revised each month, so data being reported now for previous months might differ from previously reported data.

Asking Prices in 2013 Rose Most in Hardest-Hit MetrosAll of the 10 metros with the largest year-over-year price increases in December were hard-hit during the housing bust. Asking prices fell by at least a third from peak to trough in these 10 metros, and by almost half or more in the three metros with the biggest price rebounds year-over-year: Las Vegas, Sacramento, and Riverside-San Bernardino.

Where Asking Home Prices Rose Most in 2013
#	U.S. Metro	Y-o-Y % asking price change, Dec 2013	Price change in bust, peak to trough	Y-o-Y % change in jobs, Nov 2013
1	Las Vegas, NV	33.0%	-61%	2.4%
2	Sacramento, CA	28.2%	-48%	1.5%
3	Riverside-San Bernardino, CA	25.9%	-50%	0.9%
4	Oakland, CA	25.2%	-39%	0.3%
5	Ventura County, CA	23.6%	-38%	2.0%
6	Warren-Troy-Farmington Hills, MI	22.7%	-37%	1.7%
7	Detroit, MI	21.8%	-40%	-0.2%
8	Los Angeles, CA	21.3%	-35%	1.7%
9	Orange County, CA	19.9%	-33%	2.1%
10	Fort Lauderdale, FL	19.1%	-48%	2.4%
Note: peak-to-trough price change from Federal Housing Finance Agency (FHFA). Change in employment from Bureau of Labor Statistics (BLS); November is the most recently published metro employment data. Among 100 largest metros. To download the list of asking price changes for the largest metros: Excel or PDF.

In most metros where the housing bust was milder, prices rose modestly year-over-year. The exceptions are Dallas, Houston, and Austin, where the housing bust was mild but prices experienced double-digit increases in 2013. West Palm Beach and several other Florida metros, in contrast, stand out for having had a severe housing bust but slower price gains in 2013 than most metros in California and Nevada.

The 10 metros with the smallest year-over-year price increases – or even declines – all had a milder housing bust than the 10 metros with the largest year-over-year price increases:

Where Asking Home Prices Rose Least in 2013
#	U.S. Metro	Y-o-Y % asking price change, Dec 2013	Price change in bust, peak to trough	Y-o-Y % change in jobs, Nov 2013
1	Albany, NY	-1.3%	-5%	0.5%
2	Baton Rouge, LA	-0.6%	-3%	0.0%
3	Little Rock, AR	0.0%	-4%	1.8%
4	Hartford, CT	1.0%	-14%	1.5%
5	Rochester, NY	1.5%	-2%	0.6%
6	Syracuse, NY	1.9%	-3%	0.7%
7	Albuquerque, NM	2.4%	-17%	0.9%
8	Camden, NJ	2.5%	-23%	1.2%
9	Tulsa, OK	2.7%	-4%	2.2%
10	Long Island, NY	3.2%	-20%	2.5%
Note: peak-to-trough price change from Federal Housing Finance Agency (FHFA). Change in employment from Bureau of Labor Statistics (BLS); November is the most recently published metro employment data. Among 100 largest metros. To download the list of asking price changes for the largest metros: Excel or PDF.

Overall, regression analysis shows that recent price gains are most strongly associated with the severity of the local housing bust. Markets where prices fell most during the bust (roughly 2006 to 2011, but varies by metro) offered bargains for investors and other buyers who have helped bid prices back up over the past two years. A second important factor is foreclosures: adjusting for other factors, metros with a higher foreclosure inventory today – including many in Florida – have slower price growth. Job growth, however, had little impact on local home price gains in 2013: the relationship between job growth and price gains was positive but not statistically significant.

Therefore, year-over-year price gains in December 2013 are still primarily a reaction to the housing bust, but this rebound effect is fading as we enter 2014. Looking at the quarter-over-quarter price changes throughout 2013, the relationship between the severity of the housing bust and the recent price recovery was stronger earlier in the year than later in the year. More specifically, the correlation between peak-to-trough price change (FHFA) and the Trulia Price Monitor quarter-over-quarter change was -.59 in March; -.45 in June; -.43 in September; and -.33 in December. This correlation is moving closer to zero, which signifies that the rebound effect is fading.

As the housing market continues to recover, factors other than the rebound effect – like job growth – will matter more for price gains. That means slower but more sustainable price increases.

Rent Gains Driven More by Job GrowthIn December, rents rose 3.0% year-over-year nationally. Among the 25 largestrental markets, rents rose fastest in San Francisco, Portland, and San Diego. Unlike recent price gains, rent gains have a positive, statistically significant relationship with job growth. Of the five large rental markets with the biggest rent increases, four had job growth of 2% or more. But of the five large rental markets with rent declines or slowest increases, just one had job growth of 2% or more.

Rent and Job Growth Trends in the 25 Largest Rental Markets
#	U.S. Metro	Y-o-Y % change in rents, Dec 2013	Y-o-Y % change in jobs, Nov 2013
1	San Francisco, CA	10.6%	2.4%
2	Portland, OR-WA	10.5%	2.0%
3	San Diego, CA	9.5%	1.8%
4	Seattle, WA	8.9%	2.3%
5	Denver, CO	7.6%	2.5%
6	Miami, FL	6.9%	1.5%
7	Houston, TX	6.3%	3.1%
8	Atlanta, GA	5.9%	2.5%
9	Phoenix, AZ	5.4%	2.3%
10	Dallas, TX	5.2%	2.6%
11	Chicago, IL	5.0%	1.5%
12	Orange County, CA	3.2%	2.1%
13	Riverside-San Bernardino, CA	3.1%	0.9%
14	Minneapolis-St. Paul, MN-WI	3.0%	1.8%
15	Sacramento, CA	2.5%	1.5%
16	Tampa-St. Petersburg, FL	2.4%	3.3%
17	New York, NY-NJ	2.3%	2.4%
18	Oakland, CA	2.2%	0.3%
19	Los Angeles, CA	2.1%	1.7%
20	Las Vegas, NV	1.9%	2.4%
21	St. Louis, MO-IL	1.3%	0.5%
22	Boston, MA	0.9%	2.4%
23	Baltimore, MD	-0.1%	1.9%
24	Philadelphia, PA	-0.1%	1.0%
25	Washington, DC-VA-MD-WV	-1.6%	0.5%
To download the list of rent changes for the largest metros: Excel or PDF

 The next Trulia Price Monitor and Trulia Rent Monitor will be released on Thursday, February 6. Here’s the full 2014 release schedule:

Month	Release Date
January	Thursday, January 9 at 12:01AM ET
February	Thursday, February 6 at 12:01AM ET
March	Thursday, March 6 at 12:01AM ET
April	Thursday, April 10 at 12:01AM ET
May	Thursday, May 8 at 12:01AM ET
June	Thursday, June 5 at 12:01AM ET
July	Thursday, July 10 at 12:01AM ET
August	Thursday, August 7 at 12:01AM ET
September	Tuesday, September 9 at 12:01AM ET
October	Thursday, October 9 at 12:01AM ET
November	Thursday, November 6 at 12:01AM ET
December	Tuesday, December 9 at 12:01AM ET

How did we put this report together? To recap the methodology, the Trulia Price Monitor and the Trulia Rent Monitor track asking home prices and rents on a monthly basis, adjusting for the changing composition of listed homes, including foreclosures provided by RealtyTrac. The Trulia Price Monitor also accounts for the regular seasonal fluctuations in asking prices in order to reveal the underlying trend in prices. The Monitors can detect price movements at least three months before the major sales-price indexes do. Historical data are sometimes revised each month, and historical data in the current release are the best comparison with current data. Our FAQs provide all the technical details.