If you've been thinking about buying a home, consider this: In virtually every city in America, it's now cheaper to buy a home than to rent.
A new analysis by the real estate company Trulia found that in 98 out of 100 U.S. cities it examined, buying a home was more affordable for most consumers than renting a similar property in an equivalent neighborhood. Only in Honolulu and San Francisco was renting found to be more economical.
Detroit has nation's lowest home prices vs. renting
The nation's most affordable housing market, in terms of the cost of renting vs. owning, is Detroit, according to the Trulia study, where the price of a home is only 3.7 times the annual rent on a similar residence. Detroit might be regarded as an extreme example, but housing bargains were to be found in even a relatively prosperous community like Grand Rapids, Mich., on the other side of the state, where housing prices were only six times the annual rent on a comparable property in a similar neighborhood.
"As rents rise and prices stagnate, homeownership is becoming even more affordable, but rising rents create a dilemma for people who can't afford to buy yet," said Jed Kolko, Trulia's chief economist. "Rising rents make it harder for people to save for a down payment, which is the biggest barrier to buying a home that aspiring homeowners face."
Down payments an obstacle to buyers
One of the biggest changes in the housing market in recent years has been that lenders are demanding bigger down payments. Lenders typically want at least 10 percent down on a conventional mortgage, and 20 percent is preferred.
FHA mortgages allow down payments of as little as 3.5 percent, but insurance fees boost the effective interest rate on those loans, diminishing their attractiveness. Zero-down payment mortgages are still available through the VA and USDA rural development, but restrictions on those types of loans mean they are not an option for most borrowers.
Trulia gages the cost of buying versus renting by comparing the asking price of homes in a given market to the annual rent on a comparable property. If the price of a home is more than 15 times the annual rent, buying is considered to be more economical for most consumers. If a person is expecting to move within five years, the cutoff is five years.
Where will prices rise, fall?
"People will pay more for a home if they expect prices to rise and give them a better return on their investment," said Jed Kolko, Trulia's chief economist. "Metros where homeownership is expensive tend to have stronger long-term economic growth and little room to build new homes, like Boston and the San Francisco Bay area, where people expect home prices to increase over time. Buying is much cheaper than renting in slow-growing places with high vacancy rates and land to spare, like Detroit and Cleveland, where prices are unlikely to improve much in the future."
Selected examples of price-to-annual rent ratios in cities around the country include: Atlanta, 6.7; Houston, 7.3; Chicago, 7.9; Minneapolis-St. Paul, 8.3: Dallas, 8.5: Phoenix, 8.8; Denver, 9.6; Miami, 10.1; Seattle, 10.8; Washington, 11.2; Raleigh, 11.3; Boston, 12.0; and New York City, 14.5.
The rations for Honolulu and San Francisco were 17.0 and 15.5, respectively; however, even at that level, the Trulia index only says renting will be more affordable for some people and buying will be a better choice for others, depending on tax deductions and other personal factors. The index does not unilaterally rate renting as the more affordable choice until the ratio reaches 20 or more.