How To Calculate If Renting or Buying a Home is Best
Buying a home or renting is all financial. There are pros and cons to both, for different reasons, and it is all about your personal income and what you can afford. Your lifestyle can impact this. The American dream is to buy a house, have your own castle. But buying a home can be like a clunker car where you continue to pour money into and the return may not be worth it when you try to sell it, depending on the real estate market. SInce RE markets vary from city to city, one has to do a lot of research to see if the market is good or bad to buy or sell.
Recently, the formula to determine whether renting or buying was provided by a well known national bank. The bank calculates the average monthly rent as a percentage of the average mortgage payment in 54 urban areas over a three month period. The estimated mortgage payments are based upon the average home sales in the same areas. The bank then calculates what most homeowners pay- home insurance and property taxes. The bank also assumes a 30-year mortgage and the average interest rate.
If the result is more than 100%, the time is more favorable to buy a home, if less, it is better to continue renting. The variables that make a difference is if you are in a higher tax bracket and earning more income that allows one to make a more than 20% down payment, which is standard. Those in the low or middle brackets that paying higher interest rates also impact.
So, if the calculation ends up at 125%, say in, Austin, Texas, it means that for every dollar spent by a new home owner, a new renter spent $1.25. If less than 100%, say, in Orange County (Los Angeles area) with 56%, it means for every dollar a new home owner spent, a renter paid only 56 cents. So, in this area, it is generally better to rent, while in Austin, better to buy a home IF you can afford it.
So, the study showed that in many urban areas in California, it is still better to rent. In Los Vegas, it is either, this is also the case for much of Texas and Denver, CO. In Florida, it is better to buy, as it is in Atlanta, GA., Chicago, St. Louis. But the average national amount for the 54 urban areas in the study showed it is fairly even at $1.05. So, on average, only 5 cents makes the difference between buying or renting or 105%. It is a slightly better time to buy.
Most buy a home as an investment and plan to stay in it 5-7 years before they sell. The average home since 1985 has provide an annual return of 3.6%, while the S&P 500, gave a return of 11%. The median sales price rose by 11% in 2013, which was the highest gains since 2005.
What all this states is if you are a home owner and wanting to sell, you need to see if the market is good or not and the similar homes in your immediate area that are selling. The same applies if you are looking to buy, find a market that is not hot to avoid bidding wars like in the San Francisco area. Ask yourself, is it more cost effective for you to continue renting based upon a mortgage payment of at least $2000. If you think about it, owning a home is misleading, you are renting from the bank who gave you the loan to buy it. The mortgage payment is another word for paying rent. If you fail to pay, eventually, you enter a default and the bank wants the home back. If you fail to pay rent, you are evicted.