The most important housing decision that most consumers face is whether to rent or to buy. So to help them with this decision, we took a look at the key market factors affecting the cost of homeownership. First off, asking home prices have started to rebound and have risen by 2.3% year over year in August (3.8% excluding foreclosures); however, rents have risen more (4.7%). This means that prices are lower relative to rents than they were a year ago. But more importantly, mortgage rates have fallen: the best rates this summer have been around 3.5%, while last summer rates were closer to 4.5%. Based on asking prices and rents during the summer of 2012, buying is now 45% cheaper than renting in the 100 largest U.S. metros, on average – that’s a savings of $771 a month. If you plan to stay in a home for 7 years, which is the average time that Americans traditionally live in a home before moving again, it is more affordable to buy than to rent in ALL of the 100 largest metros in the U.S.

Costs aside, the decision to rent or buy a home is very personal. There’s a strong emotional component: some people want the security of homeownership and others want the footloose freedom of renting. But the financial factors are also very personal because the decision to rent or buy depends on:

  1. Can you qualify for a mortgage at the best rate available?
  2. Which tax bracket are you in, and do you itemize your deductions?
  3. How long will you stay in your home?

To calculate whether renting or buying costs less, we assume people can get a low mortgage rate of 3.5%, itemize their federal tax deductions and are in the 25% tax bracket, and will stay in their home for seven years. (Below, we’ll show how changing these assumptions can affect the rent-versus-buy math.) We do the following calculations:

  • First, we looked at all the homes for sale and rentals listed on Trulia in June, July and August 2012. On for-sale homes, we took the asking price and estimated what it would rent for; for rentals, we took the asking rent and estimated what it would sell for. That way, we can calculate the average rent and asking price for an identical set of properties in a metro area, for a direct apples-to-apples comparison. By looking at homes currently for sale or rent, we’re able to illustrate the actual housing options that consumers face right now.
  • Second, we estimated the total costs of renting and buying for the typical property in a metro over a seven-year period. We factored in all the costs of homeownership (e.g., closing costs, maintenance, insurance, taxes, etc.), along with the tax benefit of deducting mortgage interest and property taxes, as well as the proceeds from selling the home after seven years with modest home price appreciation. On the rental side, we factored in renters’ insurance and the security deposit. Finally, we calculate the net-present-value of all those costs to capture the opportunity cost of tying your money up in a down payment. This gives us the total cost of buying versus renting. We then calculated the dollar difference and percentage difference between renting and buying.
  • Finally, we looked at alternative scenarios of the costs of renting versus buying, by changing the mortgage rate, the income tax bracket for tax deductions, and the time horizon.

Where Buying is a Slam Dunk
With a 20% down payment, a 30-year fixed mortgage rate at 3.5% and at the 25% federal tax bracket, homeownership is cheaper than renting in all of the 100 largest metros by a wide margin. There is no market where the financial decision is even close, so long as you plan to stay in the home for at least seven years, get 3.5% mortgage, and itemize your tax deductions. However, how much cheaper it is to buy a home than to rent really depends a LOT on where you live.

Buying is 24% cheaper than renting in Honolulu, 28% cheaper in San Francisco, and 31% cheaper in New York. On the other end of the spectrum, homeownership is extremely affordable in Detroit, where buying a home is 70% cheaper to buy than to rent, and 63% cheaper in both Oklahoma City and Gary IN. Check out the top 10 lists below to see where the cost differences between buying and renting are smallest and largest.

Where the Financial Advantage of Buying Over Renting is Smallest
U.S. Metro Monthly cost of home ownership ($) Monthly cost of renting ($) Difference ($) Difference (%)
Honolulu, HI

$1,519

$2,007

-$488

-24%
San Francisco, CA

$2,327

$3,226

-$899

-28%
New York, NY-NJ

$1,857

$2,687

-$831

-31%
San Jose, CA

$1,819

$2,646

-$827

-31%
Los Angeles, CA

$1,379

$2,020

-$641

-32%
Ventura County, CA

$1,516

$2,274

-$759

-33%
Orange County, CA

$1,610

$2,423

-$813

-34%
San Diego, CA

$1,314

$1,981

-$667

-34%
Albany, NY

$999

$1,535

-$536

-35%
Long Island, NY

$1,603

$2,513

-$910

-36%

Note: Cost of homeownership assumes that the home is sold after 7 years and includes closing costs, maintenance, insurance, property taxes and other costs. Cost of renting includes security deposit and renters insurance. Monthly cost is based on net present value of costs over 7 years. Monthly costs are based on the average across all properties listed in the metro area, including those for sale and those for rent, in summer 2012.

Where the Financial Advantage of Buying Over Renting is Huge
U.S. Metro Monthly cost of home ownership ($) Monthly cost of renting ($) Difference ($) Difference (%)
Detroit, MI

$349

$1,149

-$800

-70%
Gary, IN

$616

$1,649

-$1,033

-63%
Oklahoma City, OK

$590

$1,576

-$987

-63%
Lakeland-Winter Haven, FL

$495

$1,276

-$781

-61%
Toledo, OH

$476

$1,222

-$746

-61%
Dayton, OH

$524

$1,332

-$808

-61%
Warren-Troy-
Farmington Hills, MI

$588

$1,494

-$907

-61%
Memphis, TN-MS-AR

$548

$1,389

-$841

-61%
Cleveland, OH

$585

$1,464

-$879

-60%
West Palm Beach, FL

$723

$1,764

-$1,041

-59%

Note: Cost of homeownership assumes that the home is sold after 7 years and includes closing costs, maintenance, insurance, property taxes and other costs. Cost of renting includes security deposit and renters insurance. Monthly cost is based on net present value of costs over 7 years. Monthly costs are based on the average across all properties listed in the metro area, including those for sale and those for rent, in summer 2012.

What does this mean in dollars? Buying is cheaper than renting by several hundred dollars a month in every large metro. The charts above show how the percent difference in buying versus renting may be smaller in San Francisco (-28%) than in almost all other metros, but the annual dollar savings is big ($899) because the rents and home prices there are so high – so even a smaller percentage difference means a big dollar difference. (Remember that we’re looking at the annual cost of buying or renting the typical listed home. Most homes listed are for-sale, and for-sale homes tend to be much larger than rentals, on average. That’s why the monthly cost of renting the typical home is higher than the actual amount most renters pay.)

Scroll through the table below to see the cost of buying versus renting in major metros across the country below or check out the full interactive infographic.

Why Mortgage Rates, Tax Brackets and Timing Matters in the Rent vs. Buy Debate
But what if you can’t get the best mortgage rate, don’t itemize your tax deductions or stay in your home for less than seven years? Each of those raises the cost of homeownership, so buying wouldn’t be quite as good of a deal relative to renting. Here’s why each matters:

  • The best mortgage rates are available for people with the best credit scores – and a not-so-hot credit score could make your mortgage a full percentage point higher, which translates to at least a 10% difference in your monthly mortgage payment.
  • Itemizing your tax deductions lets you subtract your mortgage interest and property tax payments from your pre-tax income, which lowers your tax burden especially if you’re in a higher tax bracket. How much does not itemizing raise the cost of homeownership? It depends on your tax bracket and the amount of mortgage interest and property taxes you would deduct.
  • Selling a home in less than seven years after buying it means that you’re spreading your buying and selling closing costs overfewer years – making the average monthly cost of homeownership higher.

To see how your mortgage rate, tax bracket and time horizon affect the cost of renting versus buying, let’s look at several scenarios for a few large metros:

SCENARIO

New York

LA

Boston

Atlanta
3.5% mortgage, 25% tax bracket, stay 7 years (baseline)

-31%

-32%

-41%

-57%
4.5% mortgage *

-23%

-24%

-34%

-53%
Not itemizing tax deductions *

-18%

-21%

-30%

-50%
Stay 5 years *

-21%

-22%

-32%

-52%
4.5% mortgage, not itemizing, AND 5 years

3%

-1%

-12%

-40%

* For these scenarios, the factors not mentioned are the same as the baseline.

 

Take Los Angeles, for instance. The top row shows that if you can (1) get a 3.5% mortgage, (2) are in the 25% tax bracket and itemize your deductions, and (3) stay 7 years, it’s 32% cheaper to buy than to rent.

Change any one of those scenarios, and buying is still cheaper than renting but less so:

  • With a 4.5% mortgage instead of a 3.5% mortgage, buying drops from 32% cheaper than renting to 24% cheaper.
  • Failing to itemize tax deductions drops buying from being 32% cheaper to 21% cheaper.

  • Staying 5 years instead of 7 makes buying 22% cheaper.

  • But all three – the 4.5% mortgage, not itemizing, and staying only 5 years – makes buying just 1% cheaper than renting – as the bottom row shows.

In New York, these same differences make buying 3% MORE expensive than renting instead of 31% cheaper. In fact, with a 4.5% mortgage, not itemizing and staying only 5 years, buying is more expensive than renting in Honolulu (by 13%), San Francisco (by 10%), and San Jose (by 4%), too.

In the other 96 of the 100 largest metros, though, buying is still cheaper than renting. In Atlanta, for instance, where buying is 57% cheaper than renting in the best of circumstances (3.5% mortgage, itemizing, and staying 7 years), buying remains 40% cheaper even with a 4.5% mortgage, not itemizing, and staying only 5 years. In fact, today’s low mortgage rates make it financially better to buy even if you only stay put for 3 years in many metros. But buying a home also involves a lot of time, emotional energy and financial risk, so we can’t really recommend buying a home that you plan to live in for just 3 years even if the financial calculation is in favor of buying. Money isn’t everything.

If Buying is So Cheap …
… why isn’t everyone doing it? Home sales are still less than halfway back to normal, and the homeownership rate continues to fall. The big obstacle holding back renters who want to buy is the down payment – even more than getting a mortgage. And keep in mind, in the metros where the cost of buying is less than half of what it would cost to rent over the long term, it still takes years to save enough for a down payment. It may be 56% cheaper to buy than to rent in Denver, for instance, but it takes more than 8 years to save enough for a down payment there. And high unemployment during the recession made it even harder than usual for people to save for a down payment. On top of that, people who lost their homes or took on lots of debt might not qualify for a mortgage. Bottom Line: Buying may beat renting in every major metro by a wide margin, saving consumers thousands of dollars a year, but buying still remains out of reach for many would-be homeowners.