It’s one of the great American choices, right up there with paper or plastic, Ginger or Maryanne and sweet tea or un-sweet. As with all classic A or B decisions, the two options are well balanced. Renting frees up cash by avoiding a down payment and provides flexibility. Home ownership offers tax advantages and an asset that may well appreciate nicely over the years.
However, for a variety of reasons, home ownership currently has an edge over renting for those in the right circumstances.
For the first time in more than 20 years, owning is cheaper than renting on a relative basis. In 1994 rents averaged $450 per month while mortgage payments averaged $550 a month. In 2008 it was still less expensive to rent than buy — $700/month on average to rent versus $800 for a mortgage. But in 2013 that changed. Rents now average $738/month while mortgages average $615.
How high are rents? More than half of all renters spent at least 30 percent of their income on rent last year, according to a recent Harvard study. That’s considered the outer limit of what a family should spend on shelter.
Meanwhile, home prices have fallen dramatically from their pre-bust 2007 levels, and mortgage rates have recently been at historically low levels. Higher mortgage rates and price increases due to limited housing inventory are slowly but surely raising the cost of buying a house. Still, this is by far the best time in 25 years to choose buying over renting.
If you are currently renting and expect to stay in Atlanta for at least five years, look to buy a house now! If you are the kind of person – like me – who bases decisions on data, trends and formulae, use the following calculation as an easy starting guideline to determine whether you should break-up with your landlord:
Divide the purchase price of a home by the annual cost of renting a similar house. If the answer you get exceeds 20, then buying is not the best option, but when the answer is below 20, then you should buy a home.
Example 1. Home cost $200,000. Cost of rent $810/month. 12 X $810 = $9,720 in rent. Divide $200,000 by $9,720 = 20.5. Don’t buy, renting is a better option.
Example 2. Home cost, $200,000. Cost of rent $1100/month. 12 X $1100 = $13,200 in rent. Divide $200,000 by $13,200 = 15. In this case you are better off buying this home.
See? Told you. Consider this revelation to be my holiday gift to you and yours. Merry Christmas and Happy House Hunting!