Buying looks better than renting in some markets
Filed under: Economy
At the top of the housing bubble, the gap between the cost of rent and the cost of buying a home widened to 66% in some parts of the country. In other words, it was 66% more expensive to buy a house and pay the mortgage than it was to rent. Historically, a gap of about 12% is the norm.Now that homes prices have dropped more than 40% in some of the hardest hit markets, we're finally seeing a light at the end of what has been a very dark tunnel. Green Street Advisors told The Wall Street Journal today that the average monthly rent for the largest 50 metropolitan areas was $1,045, compared with after-tax mortgage payments of $1,300 (this assumes a 5.5%, 30-year fixed-rate mortgage). That means mortgage payments average just 24% more than rent payments, the narrowest gap since 2001. If mortgage rates fall to 4.5%, which some economists are advocating, mortgage payments would average 14% more than rent payments -- a level we haven't seen since 1998.
Moody's, in a separate report, came to a similar conclusion that home prices relative to rents are more in line with their historical relationship. In its new report, "Housing in Crisis: When Will Metro Markets Recover?" Moody's found the following:
* House prices will stabilize by the end of this year
* The national Case-Shiller house price index will decline by another 11% for the fourth quarter of last year for a total peak to trough decline of 36%
* By the end of this unprecedented downturn, house prices will have declined by double digits peak to trough in nearly 62% of the nation's 381 metro areas. In about 10% of metro areas, price declines will exceed 30%.
Now that we're seeing the light at the end of the tunnel, if you live in one of the hardest hit areas, it's a great time to find some excellent buys, either with short sales or foreclosure homes. Use this excellent calculator from bankrate.com called "Buy or Rent Your Next home" to test whether it's time for you to buy. Then use this calculator, "How much home can you afford?" to determine a mortgage payment you can afford. Then use the mortgage calculator to determine what your payments will be at various interest rates. Compare these findings to what you are paying in rent.
Since you can write off mortgage interest, don't forget to multiply the amount of interest you will pay in a year times your current income tax rate to figure out your tax deduction. Divide that by 12 and subtract it from your mortgage payment. Now compare that mortgage payment to what you are paying in rent. If your mortgage payment will be lower than your rent, it's time to ask yourself, "what am I waiting for?"
People living in the hardest hit areas are finding that they can buy a home with more living space than it costs to rent. If that's the case for you, it's time to go house hunting. But, remember you should also check your credit score before you start looking. If your credit score is below 720 you will need 20% down in most of the hardest hit areas. You may want to work on improving your credit score before going house hunting so you can qualify for the lowest interest rates.
Lita Epstein has written more than 25 books including the "Complete Idiot's Guide to Improving Your Credit Score" and "The 250 Questions You Should Ask About Buying Foreclosures."
Why is Oprah going to cable? Hint: It's nothing to get teary about
Kisses from Hershey: Candymaker may court Cadbury with $17 billion bid
D-Day for Harry Reid: Can he wrangle 60 votes for Senate health reform bill?
