Buy or Rent? Decision May Come Down to Location and Taxes
By: Matthew Rocco
May 21st, 2014
The latest reports from the Census Bureau have fueled concerns over a sudden slowdown in housing activity. The Mortgage Bankers Association said its mortgage application index is down 12% year-over-year, although it recovered 3.6% compared to last week.
According to the National Association of Homebuilders, growth in April housing starts was largely due to increased construction of multi-family homes, driven by demand for rental apartments. First-time buyers continue to wait on the sidelines, NAHB chief economist David Crowe wrote in a recent blog post.
Adam Leitman Bailey, a real-estate attorney and author of “Finding the Uncommon Deal,” believes it makes more sense to buy a home in most cases.
“It’s very simple. If you believe in the American Dream and the economy, you buy. There’s no better way to appreciate wealth,” Leitman Bailey said.
But even with low interest rates, middle-income earners are having a hard time getting into the market, Leitman Bailey added. “This is the first time in history we can’t live the American Dream. People used to buy their first homes in their late twenties and early thirties.”
For Americans interested in buying a home, availability remains a challenge. Zillow data show seasonally adjusted inventories hit 1.34 million in March, down 8.6% since December.
Still, compared to renting, the amount of time it takes for home buyers to make good on their investment is “shorter than conventional wisdom,” Zillow said in a recent report.
In the first quarter, Zillow measured a Breakeven Horizon of just 2.1 years nationally.
Zillow’s Breakeven Horizons estimate when a homeowner would have more money and assets than if they had rented the same house.
The breakeven point varies widely across the U.S. Many counties in California and most in Florida have Breakeven Horizons of less than two years. Areas with Breakeven Horizons greater than the national average are clustered in the Northeast, Arizona, Colorado and western Oregon.
RealtyTrac, another industry researcher, determined that it remains better to purchase a home in those same areas. For instance, residents of Arizona and most counties in New Jersey are better off buying a home.
Overall, RealtyTrac said monthly mortgage payments for median priced homes — plus insurance and taxes — are less than the average monthly rent for a three-bedroom home in 92% of 1,586 U.S. counties. Renting is cheaper in high-priced markets like New York, San Francisco and parts of Washington, D.C.
RealtyTrac also found that roughly 33% of Americans live in markets where the average rent is unaffordable for median income earners. Fewer Americans, about 15%, live where median income earners can’t afford to purchase homes at the median price.
“You should buy for 20 years, but buy when you can afford it,” said Leitman Bailey, whose New York-based firm Adam Leitman Bailey, P.C. handles about 1,000 closings each year. “You never want to lose sleep at night wondering if you can afford your next mortgage payment. That’s when you rent.”
In addition to the findings from RealtyTrac and Zillow, buyers also have U.S. tax law on their side. Homeowners have access to the mortgage interest rate deduction and other tax benefits not available to renters.
Zillow takes tax deductions into account when generating Breakeven Horizons. On the rent side, Zillow incorporates out-of-pocket savings and assumes that money is placed into an account earning 5% annually.
Leitman Bailey suggested that prospective buyers track their spending to determine when they can afford a home. Shoppers should also build credit in preparation for obtaining a mortgage.
“The 2008 crisis caused renting to be cool for a couple years. Then people realized they were wasting money renting,” Leitman Bailey said. “If you can afford to buy, one of the best reasons is taxes. Our laws are set up to promote buying.”