Tag Archives: renting vs. buying


Different Generations See the Value in Homeownership

“During an online chat with other real estate professionals last week, the question of the true value of homeownership was raised. My son, Bill, and I each chimed in unaware of the other’s response. It was interesting how the different generations valued homeownership for slightly different reasons. Below, are both responses.

Bill’s Response:

I want to weigh in as a 20-something who recently purchased a home for the first time.

While the financial reasons (wealth-building, not wanting to throw away rent payments every month, that owning is actually cheaper than renting in many markets right now) certainly had an impact on our decision, I think there are too many that are quick to dismiss the non-financial reasons that my peers and I discuss more often than people think.

There’s a very good reason why my wife and I host more parties than my friends who live in apartments (space). There’s a reason why we get more compliments about our house than our renting friends (freedom to choose our own stuff). We have the greatest dog in the world, while I hear “I can’t wait to get a house because I’ve always wanted my own puppy but I can’t right now”.

Bill

As a “young” buyer, do I want to make a smart decision? Of course. Do I want to understand the numbers and feel confident with the purchase? Sure. But that’s not what I woke up dreaming about 2 years ago. I woke up dreaming about the house that my wife and I can raise a family in; the house where we’re going to have barbecues with all our neighbors.

We woke up talking about the house that finally allowed my wife to get the dog she’s wanted since she was a kid (and that I fell in love with). We started picking out bedroom colors for our future babies.

You want advice for helping more young buyers? Ask them what their dreams are. What are their goals? What do they wake up talking to their partner about? Help them realize this and you only have to show them that the financials make sense (we’re not looking to make a quick buck on the house we’re living in).

Isn’t this what real estate is about anyway? Helping people realize their dreams? That’s what it was always about in my house growing up (thanks Steve). That’s what my wife grew up thinking. That’s what my friends (all in the first time home buyer range) think. Why not talk to them about this?

Sorry for the rant everyone. Figured I had a spot for the voice of the young buyer to be heard by the industry’s elite and I couldn’t pass that up. Thanks for reading.

My Response:

Do I think that homeownership is right for everyone? No, I don’t.

Do I think people who can’t afford a house should buy one anyway? No, I don’t.

However, I do believe for the majority of families that homeownership is important. Instead of giving you the links to the numerous studies I have that delineate the benefits of homeownership, I’ll give you one anecdotal story – my own.

view

Guess where I got the seed money to start my real estate company? My home.

Guess where I got the money for Bill’s college education? My home.

Guess where my younger son, Steven, moved to when he couldn’t find gainful employment after college? My home.

Guess where my older son, Bill, and his wife (and cat & dog) moved to when Sandy ravaged their house? My home.

Guess where I got the down payment for a winter getaway in South Beach for my wife and me? My home.

The home I struggled to buy over 20 years ago has financed my business, put two sons through college and enabled me to buy a winter escape in Florida. And during that whole time, it also allowed me to provide my family shelter during their times of need.

Do I firmly believe in the value of homeownership? Yes, I do!!”

By: Steve Harney, KCM Crew with KCM Blog


3 Financial Reasons to Buy a Home NOW!

Part I – Prices Are Rising at an Accelerated Rate

prices up

The price of a home is the major consideration when deciding whether or not it makes financial sense to purchase a house. Experts are not only projecting that house values will increase in 2013. They are also more optimistic in the level of appreciation they are projecting as the market begins to heat up. Here are some examples:

The Home Price Expectation Survey

The latest survey of a nationwide panel of 118 economists, real estate experts and investment and market strategists reveals they project home values to end 2013 up an average of 4.6% according to the first quarter. This is after they had projected a 3.1% increase just three months ago.

Bank of America

In a report titled, Someone Say House Party?, Bank of America analysts revised their projections upward:

“Home prices continue to show momentum amid shrinking inventory and record high affordability, prompting us to revise up our original forecast of 4.7% for home prices this year. We now expect national home prices, as defined by the S&P Case Shiller home price index, to increase 8% this year.”

Capital Economics

According to a report in DSNewsCapital Economics also upgraded their prediction:

“Strong demand and tight inventory have brought existing home sales back to ‘normal’ levels, and further gains are possible, according to the latest market report from Capital Economics. Additionally, market conditions may prompt lenders to “loosen the purse strings slightly” and lend a little more freely.

These conditions, combined with broader economic indicators, lead Capital Economics to revise its previous forecast of a 5% price gain this year up to 8%.”

Morgan Stanley

In an article from HousingWireMorgan Stanley joined the party:

“Strong momentum in home prices as well as housing activity gave Morgan Stanley analysts enough confidence to upgrade their home price appreciation projections to roughly 7% (from 5%) for 2013, according to its latest global securitized credit report…

“The momentum in most metrics of housing activity is running well ahead of the pace we had expected,” said James Egan, Jose Cambronero and Vishwanath Tirupattur, analysts for Morgan Stanley.”

Not only are prices projected to appreciate. Experts are actually revising their projections upward as demand maintains its momentum.

Part II – Interest Rates Are Increasing

interest rates

A big component in the cost of a home is the mortgage interest rate a purchaser pays. Understanding where rates are headed will help in making a decision whether to buy now or wait.

So, Where Are Rates Headed?

No one can know for sure. The Fed has been artificially holding rates down to stimulate the economy. However, as the economy improves, many experts expect rates to creep up. As an example, HSH Associates, the nation’s largest publisher of mortgage and consumer loan information, recently explained:

“The stronger the economy becomes, the higher rates may grind; the Federal Reserve is keeping them low to goose the economy, but an economy responding to the Fed’s medicine will soon see less of a need for it in order to function. If not otherwise manipulated, higher rates are the natural result of a growing economy, as rising demand for available credit supply and concerns about inflation allow costs to rise.”

The Mortgage Bankers Association (MBA) agrees. They were quoted in HousingWire late last year regarding their thoughts on where rates would be headed in 2013.

“After reaching record lows in 2012, mortgage rates are expected to creep up slowly in 2013, the Mortgage Bankers Association predicted.”

In the MBA’s latest Mortgage Finance Forecast they forecast that the 30 year interest rate will be 4.3% by the end of the year. This represents an increase of almost a full percentage point from the 3.4% rate available at the end of 2012.

Mortgage Payments

For example, we show the impact a one percent increase in rate will have on the monthly principal and interest payment on a $200,000 mortgage.

Freddie Mac’s Weekly Primary Mortgage Market Survey reveals that rates have increased by 2/10ths of a percentage point already this year.

As we mentioned, no one knows for sure where rates will be a year from now. But, many experts think they may be as much as a point higher. With rising residential real estate prices and the possibility of higher mortgage rates, waiting to buy a home makes no sense in our opinion.

Part III – Rents Are Skyrocketing

money evaporating house

Whether you own or rent, you will have a monthly housing expense. The question is how that expense will change in the future. When you purchase a home, for the most part, you lock-in that monthly housing expense for the length of the mortgage you take (15 or 30 years for example). When you rent a home, your housing expense is impacted by movements in the supply and demand for rental properties.

Historically, residential rental rates increase by 3.2% on an annual basis. However, in the current housing environment, there is an increasing demand for residential rental properties. This increase in demand has dramatically impacted rates. Zillow, in their most recent report, revealed that rental rates in the U.S. increased by 4.5% over the last twelve months. Other studies have projected rental rate increases of 4-5% over the next few years.

The only way to have control of your housing expense is to buy.

But Isn’t Buying Much More Expensive Than Renting?

Not right now! As a matter of fact, with prices down and mortgage rates at historic lows, it is LESS EXPENSIVE to buy than rent in most areas. In a recent reportTruliarevealed it is cheaper to buy than rent in ALL of America’s largest regions.

According to Jed Kolko, Trulia’s Chief Economist:

“People who didn’t buy a home last year may have missed the bottom of the market, but they haven’t completely missed the boat. Buying remains cheaper than renting in all 100 large metros. Even buyers who can’t get today’s lowest mortgage rates will still find that buying makes more financial sense than renting in nearly all local markets.”

However, Kolko went on to say that this opportunity may soon disappear:

“Although buying a home is still cheaper than renting, the gap is closing. In 2013, home prices should rise faster than rents, and mortgage rates are likely to rise in the next year as the economy improves. By next year, buying could be more expensive than renting in some housing markets, even for people with the best credit.”

Again, the only way to lock-in your monthly housing expense is to take that decision out of the hands of a landlord by owning. With both prices and interest rates set to increase, the best time to buy is right now.

By: The KCM Crew, KCM Blog


Trulia: Owning Costs 44% Less than Renting

Home price gains may be outpacing increases in rent, but the cost of being a homeowner is still much less than that of a renter, according to Trulia’s Winter 2013 Rent vs. Buy report.

After factoring all cost components including transaction costs, taxes, and opportunity costs, Trulia found buying a home is 44 percent cheaper than renting, down slightly from 46 percent a year ago.

“Although buying a home is still cheaper than renting, the gap is closing,” said Jed Kolko, Trulia’s chief economist. “In 2013, home prices should rise faster than rents, and mortgage rates are likely to rise in the next year as the economy improves. By next year, buying could be more expensive than renting in some housing markets, even for people with the best credit.”

In the last year, asking home prices showed a 7 percent gain compared to a 3.2 percent increase in rents during the same time period, according to data from the real estate site.

Trulia explained low mortgage rates have kept the cost of owning down; for the analysis, a 3.5 percent mortgage rate was assumed.

The San Francisco-based company also revealed that out of the 100 largest metros analyzed, buying was more affordable than renting in all metros.

In some metros, the cost of buying was much less than the national average. The buy-rent gap was the largest in Detroit, where buying costs 70 percent less than renting. For the next four metros in top five, the cost of owning was 63 percent less than renting; the four metros were Dayton and Cleveland in Ohio; Warren, Michigan; and Gary, Indiana.

Although owning was found to be less expensive in all metros, owners in San Francisco averaged the smallest savings at 19 percent, a steep decrease from the 35 percent savings seen in 2012.

If one were to receive a mortgage rate of 4.5 percent, Trulia noted the cost of buying would be just 9 percent cheaper in San Francisco. However, a rate of 4.5 percent would still make buying more affordable than renting in all metros analyzed.

“People who didn’t buy a home last year may have missed the bottom of the market, but they haven’t completely missed the boat,” Kolko added. “Even buyers who can’t get today’s lowest mortgage rates will still find that buying makes more financial sense than renting in nearly all local markets – so long as they can get a mortgage in the first place.”

Other metros where owning may not be as enticing to borrowers based on savings were Honolulu, where the cost of owning is 23 percent cheaper, followed by San Jose (-24 percent), New York (-26 percent) and Albany (-30 percent).

By: Esther Cho, DSNews


The Finances of Renting vs. Buying

Trulia reported this week that homeownership is 45% cheaper than renting in the United States. Jed Kolko, Trulia’s Chief Economist explained:

“Homeownership is cheaper than renting in all of the 100 largest metros, by a wide margin. Despite the recent price rebound, rents continue to rise faster than prices, and mortgage rates are near record lows.

Homeownership makes the most financial sense for people whose strong credit scores let them snag the lowest mortgage rate and who get the biggest benefit from deducting mortgage interest and property taxes from their income taxes.”

This news did not come as a surprise to us as we have reported that today’s rental market definitely favors the landlord. Below is a graph of how rental prices have increased recently and where they are projected to go over the next few years based on a report from Marcus & Millichap.

It cost more to rent than own right now. And you don’t get any of your rent back in the future. History shows us, in the long term, you can build equity in a home. Dr. Ken Johnson earlier this year explained in a post on this blog:

“It appears that homeownership creates extra wealth mainly through its ability to force owners to save rather than through property appreciation. Thus, homeownership appears to be a self-imposed savings plan, which through time leads to greater wealth accumulation as compared to comparable renters. In short, buying a home makes Americans save.”

The Joint Center for Housing Studies at Harvard University released a study last year titled America’s Rental Housing: Meeting Challenges, Building on Opportunities. In the study, they actually quantified the difference in family wealth between renters and homeowners:

“[R]enters have only a fraction of the net wealth of owners. Near the peak of the housing bubble in 2007, the median net wealth of homeowners was $234,600—about 46 times the $5,100 median for renters. Even if homeowner wealth fell back to 1995 levels, it would still be 27.5 times the median for renters.”

What Does This All Mean?

We believe David Shulman, senior economist with the UCLA Ziman Center for Real Estate said it best:

“The American Dream of homeownership may be comatose, but it is not dead, and the wake-up call will come in the form of higher rents.”

 

By: The KCM Crew, KCM Blog