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Should you buy or rent? Low mortgage rates make it a good time to buy a house in some markets

What a difference a year makes.

In February 2019, we reported on how it was increasingly difficult to find a market where it made more sense to buy than rent.

Fast forward 16 months and one pandemic later, and it’s safe to say that the rent-versus-buy gap is only shrinking with each passing day.

According to realtor.com, over 80% of large counties saw the gap between the cost of renting vs. buying a home shrink in the first quarter of 2020. And that was at the beginning of the COVID-19 pandemic’s impact on the housing market.

Since the end of the first quarter, of course, COVID-19 has dramatically and further affected the economy. As such, it remains to be seen just how local housing markets calibrate to new conditions, realtor.com economic analyst Nicolas Bedo writes in the company’s first-quarter report.

Certainly one factor contributing to a further tightening of the gap is the fact that mortgage interest rates continue to dip. As of June 25, the average rate for a 30-year fixed mortgage remained at an all-time low at 3.13%.

Meanwhile, rents are dropping, but not at the same pace that mortgage rates are declining. Certain markets are seeing more rent decreases than others, such as Boston, Detroit, New York, Salt Lake City, San Francisco and San Jose, California.

For some, the lower interest rates make purchasing a home more economically viable and practical than continuing to rent, so it’s not surprising that we saw U.S. home prices actually grow by 5.5% in April despite the pandemic.

The numbers

According to realtor.com, the monthly cost to purchase the U.S. median home was $1,584 in the first quarter of 2020, compared to the median monthly rent of $1,391. On average, buying the median priced home accounts for 29% of the national median income, while renting accounts for 25%.

It’s important to note, though, that the majority, or 81%, of the 593 U.S. counties analyzed still favored renting over buying in the first quarter of 2020. However, over the previous year, 21 of the 593 U.S. counties analyzed switched from being more affordable to rent to being more affordable to buy.

Top areas where buying was more affordable than renting in the first quarter include Clayton County, Ga.(Atlanta Metro Area); Baltimore City, Md. (Baltimore Metro Area), and Richmond County, Ga. (Augusta Metro Area).

Of larger counties with populations over 100,000, the monthly cost of buying a home is cheaper than renting in 19% of counties, up from 16% last year. Over this time period, seven larger counties swapped from being more affordable to buy to being more affordable to rent. The five largest counties to switch were:

  • Philadelphia County, Penn. (Philadelphia-Camden-Wilmington, PA-NJ-DE-MD metro area)
  • Dauphin County, Penn. (Harrisburg-Carlisle, PA metro area)
  • St. Joseph County, IN (South Bend-Mishawaka, IN-MI metro area)
  • Richmond City County, Va.  (Richmond, VA metro area)
  • Montgomery County, Ala. (Montgomery, AL metro area)

I hopped on the phone with Javier Vivas, realtor.com’s director of economic research, and he told me that things have been changing quickly in the face of the pandemic. In fact, the gap has likely shrunk even more during the second quarter.

“Even though credit access is getting a little harder for most, rates are extremely favorable to buyers compared to historically,” he said. “So a big advantage for buyers is that if there is enough confidence in their income and job stability, home purchasing remains a very attractive option.”

However, just how attractive depends largely on where the potential buyers are located and what life stage they are in, Vivas pointed out. Some markets are seeing more dramatic swings than others. 

“We’ve seen some flattening in rents and home values in both the renting and purchasing sides,” he added. “For now, big declines in rents or asking prices are fairly rare. We’re seeing that more in overvalued and very expensive markets. But overall, the majority of markets are mostly adjusting by simply not moving.”

I talked with a couple of mortgage brokers and naturally, they were bullish on the whole buying-versus-renting scenario.

Brian Covey, vice president of regional product in loanDepot’s Nashville, Tenn. office, told me that his office has seen “a significant increase” in new home loan applications. He believes that buying a home makes more economic sense than it used to for many people.

For example, he said he recently performed an analysis for one potential home buyer and found that the cost of purchasing a $300,000 home was nearly equal the amount of renting a standard two-bedroom apartment. The monthly cost averaged about $1,700 to $1,800 a month, with the biggest difference being that when purchasing a home, the buyer will likely see appreciation in home value as well as amortization. So after a 10-year period, that buyer would likely see a net gain of about $150,000, per Covey’s estimates.

Of course, these numbers are for a “hot” market such as Nashville. Other markets that are not as booming may not see as much of a gain.

With rent increasing at an average of a 3 to 3.5% increase per year, that current cost to rent will naturally only keep going up too, Covey also points out.

“Loan rates are incredible, and people don’t need as much money down,” he said. “People are quite surprised at what they can afford. It’s mostly a matter of inventory and location.”

The COVID-19 pandemic has played a factor too. With so many people working from, and spending time, at home, a larger group of people are itching for more indoor space (in some cases for home offices), as well as their own private outdoor space.

Kevin Peranio, chief lending officer at PRMG in Newport Beach, Calif., agrees that location is a factor in where it might make more sense to buy than rent. A shortage in inventory remains a challenge in many markets, too.

But overall, he points out that historically low interest rates have been a major driver in increased buying interest.

“Money is the cheapest to borrow than it has ever been in our lifetime,” Peranio said. “And it might even go lower.”

With home prices generally appreciating at about a 5% rate over a 30-year period, regardless of geography, he maintains that buying can be viewed as a “forced savings plan.”

However, he admits it might not be for everyone. For those who don’t want to commit to settling down, or just don’t want to deal with maintenance, renting might still make sense.

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