Recent housing statistics show that nationwide, those looking to rent face soaring prices.1 According to MarketWatch, rents across the country were up 11.5% since August a year ago. With rental costs hitting new highs and mortgage rates remaining low, buying a starter home now costs less per month than renting a similar-sized unit in 24 of the 50 largest U.S. metropolitan areas, according to the Realtor.com®.
As rental costs climb, there is a settling down in the home sales market. The super-frenzied activity that occurred earlier in the year (e.g., bidding wars, home price growth) has calmed. If you’re a renter worried about rising prices, now is a good time to consider a home purchase.
At the most basic level, what makes a home affordable comes down to simple math. Comparing the affordability of renting and buying can feel like apples and oranges at first. Rather than looking at the total cost of a home, which can be hundreds of thousands of dollars, think about the portion of your income that goes toward paying your housing expenses on a recurring basis.
If you’re weighing buying versus renting, your monthly costs are likely the focus of your decision. The monthly cost of renting is pretty straightforward, but the monthly cost of owning a home depends on many factors, including: your loan amount, interest rate, the type of loan you get, and other factors. In addition to your credit score, your debt-to-income (DTI) ratio (PDF) is an important part of your overall financial health. Getting pre-approved is the best way to see which purchase options are available to you.
According to the National Association of Realtors (NAR), monthly mortgage payments are rising, but they’re still significantly lower than the typical rental payment. Recent NAR data on homes closed nationally shows the median monthly mortgage payment is $1,204. By contrast, the median national rent is $1,575. However, figures vary based upon the region of the country and the size of the city. In most metropolitan areas, rents skew even higher. For example, rents in the Maryland suburbs of Washington, D.C. (Prince George’s and Montgomery Counties) average $2,263, with mortgage payments in the same range.
More reasons to purchase
Besides the rising cost of rent, here are some other factors to consider when buying a home.
- Equity and future benefits. Buying lets you build equity in your purchase over time. (Your home’s value surpasses any remaining debt on the home.) People that buy now while prices and interest rates are low will reap the financial gain of an appreciation in home values.
- Stable, fixed costs means easier financial planning. As we have seen in the past, rent amounts normally increase year to year. Using either a 15 year fixed or a 30 year fixed rate mortgage will be able to plan financially for the future with a fixed cost for housing.
- Stability. Putting down roots in a home you call your own can provide peace of mind and be quite satisfying for many people.
- Stiff competition. The current heightened demand for places to rent is outpacing supply.
- Landlords are not quite so willing to offer incentives as they once were.
- Home-sale inventories are starting to climb. It’s still hard to find entry-level homes, but we are seeing more instances of smaller homes coming on the market.
The bottom line
There are multiple benefits to buying sooner rather than later. If you are part of the rental crowd considering a home purchase, now could be one of the best times in history to take the plunge and become a new homeowner.
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Resources: Bloomberg L.P., National Association of REALTORS®, CNBC LLC. Fannie Mae, Zumper National Rent Report, Rentdata.org