Buying versus Renting

A report published by economist Jed Kolko of Trulia in March of 2013 states that on average it is 44% cheaper to own a residential property than to rent a similar property in the 100 largest metropolitan areas in the US. In Philadelphia, it is 40% cheaper to buy than to rent. The report considers the following in arriving at this conclusion:

  • Similar homes in the similar neighborhoods were compared, not the average rent and average sale price of homes overall.

  • Initial and future costs of renting and buying were considered including maintenance, insurance, taxes, price and rent appreciation and inflation

  • One time costs such as closing costs, security deposits, etc. were included as well

  • The initial set of assumptions were that a buyer put down 20%, took out a 3.5% 30 year mortgage, was in the 25% tax bracket and itemized deductions on their income tax.

The prices of owning and renting were closest in San Francisco at 20% cheaper to own and furthest apart in Detroit at 70% cheaper to own. In general, the largest advantage for buy versus rent is in the Midwest and the least on the east and west coast. In some metropolitan areas, such as New York, the costs of renting versus owning vary significantly according to location. In general, this is not the case, however.

The primary factors that could make renting less expensive are: period of ownership, mortgage rate and whether deductions are itemized. For example, if mortgage rates are 4.5% instead of 3.5% the buy advantage shrinks from 44% to 33%. At this time, the average 30 year fixed mortgage rate is 4.38% so the advantage has shrunk a bit if other factors are kept constant.

Another big factor is how long an owner stays in a home. If the period goes from 7 years down to 3 the advantage goes from 44% to 20%. In evaluating whether to buy versus rent one needs to keep all these factors in mind.

Looking into next year, the buy-rent gap may tighten if the inventory of houses does not expand and rent appreciation is modest as expected.

See the full text of the report here

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