Is it Really Less Expensive to Own than Rent?
Realogics Sotheby’s International Realty and Caliber Home Loans looked at average prices of newer condominiums and compared rents for comparable apartments. They found the total cost of ownership was effectively lower when factoring income tax deductions, not to mention the opportunity for capital appreciation. The research was performed as part of a recent think tank hosted by the Puget Sound Business Journal, which was published as a section called The Manhattanization of Seattle.
“Prospective homebuyers may not realize that there are zero down payment mortgage options and special credits available for certain buyer profiles that makes it very affordable to purchase,” said Trevor Bennett, a mortgage banker with Caliber Home Loans. “When you couple this with sharp pricing, low interest rates and income tax deductions, that math works out in favor of homeownership.”
As published by The Puget Sound Business Journal, rents have grown by 35% since 2011 and condo values have lagged but are now on the rebound. At the same time lending guidelines have loosened up with higher leverage financing options so buyers can put less money down.
“This is pivotal because the market is appreciating faster than most consumers can save,” adds Bennett. “So the notion of renting and building up a larger down payment to buy a home in a couple of years may not make sense. Not only do I feel there will be more buyers competing on fewer homes but I fear interest rates may also be higher. You can lock in today’s purchase price and today’s mortgage rates and as you save ahead you can always pay down your mortgage quicker.”
RSIR recently noted that Seattle area home prices are setting new records and at 2.5% growth, month over month appreciation eclipsed San Francisco for the first time.
“We are in a very special market and savvy consumers should take advantage of these unique conditions while they can,” said Dean Jones, President and CEO of Realogics Sotheby’s International Realty. “This opportunity comes at a time when consumer confidence is high and the markets point to home value appreciation ahead. There are many qualified buyers that are renting and while it’s always easier to stay put and sign another lease, deferring a purchase by even a year could mean the loss of tens of thousands of dollars when factoring income taxes and potential capital gains.”
The following spreadsheet illustrates the comparison of an actual new development that is exploring whether to build condominiums or apartments.
COST TO RENT
Annual Cost of 1 Bedroom
+ Den To Lease
COST TO OWN
Annual Cost of 1 Bedroom
+ Den To Own
The actual interest rate ranges from 3.99% to 4.375% and the monthly PITI (principle, interest, taxes and insurance) would vary somewhat depending on borrower’s credit score. Nonetheless, from a consumer perspective it was noted that the total annual cost of ownership (not including down payment) ranged from 0.2% to 2.3% more to own these homes versus renting them before calculating income tax deductions on the owner’s tax return. Not only would that make this home less expensive to own but it sets up the owner for capital appreciation, which has been trending much higher than the added costs of ownership. Every borrower’s situation is unique and consumers are encouraged to contact a Caliber Home Loans mortgage banker to explore their purchasing power. Trevor Bennett can be reached at 206.940.2558 or via email.
This trend actually began occurring in 2013, which was noted by King 5 TV and captured on a blog post byRSIR. Since then rents have grown by double digits and the market today is even more favorable for would-be buyers. However, experts caution that these conditions may erode as both condo values and interest rates are projected to rise. Some pundits worry if this rate of inflation is setting up for another market correction but those closest to the ground aren’t as convinced. Seattle is America’s fastest growing city, demand is high and inventory is tight leading many brokers to believe these trend will go on for years.
“I remember when we were selling Olive 8 at the bottom of the market, there were plenty of doubters about the trajectory of the marketplace then but we got it right,” adds Jones. “I’m confident in our opinions now. The law of supply and demand doesn’t waiver with consumer speculation or market fears. There are a lot of new residents coming to the region and the market fundamentals are strong. Our median home prices are still half that of San Francisco for now but not for long.”