How Much More Expensive Is It to Buy a House Instead of Renting in 21 Major Cities
Contrary to popular belief, buying a home isn’t always better than renting. It depends on a number of factors, and houses are sometimes not valued as much as one might think. Real estate consultant John Burns actually calculated how much more it costs to buy a home compared to renting a home in 21 US cities.
While most of us believe that buying a home makes more financial sense, this view is based on a few unpredictable assumptions. First, future valuation is usually considered in the decision, and Burns explains:
Most indices show that historically home prices have risen 1-2% faster than income, but over a 30-year period of falling mortgage rates. If you think rates will rise, or at least stay the same, a price hike can be an aggressive assumption.
However, it is true that you do actually own your home after the mortgage is paid, so even if your home is not valued in value, you still have an asset, right? And this is better than nothing, as it would be if you rent. However, as we told you earlier, you should also consider the opportunity cost of paying off your mortgage . If the difference between your rent and your potential mortgage is large, you can invest that money and, over time, earn more than your home expects. This is not always the case, but it sounds more true in some markets than in others. In San Francisco, for example, rent is expensive, but the monthly mortgage payment will be excessive.
To get an idea of the difference in monthly premiums between buying and renting, Burns has put together a handy map that shows the difference in 21 major markets. He explains:
Below is a chart of the major US markets and the premium to own versus rent, as seen through the eyes of most new buyers. We assume that the choice is between renting an apartment in a large apartment complex and buying a home worth 80% of the average home price (a reasonable guess for new buyers) with a 95% LTV loan.
Of course, these numbers are based on market averages for each city or metro area. They also assume that the down payment is only 5 percent, which is quite small. Obviously, the more money you put into your home, the lower your monthly payment will be. However, this data gives you a general idea of what prices look like in these cities. If you’re looking for a more personalized idea of whether you should rent or buy, the New York Times is a great detailed calculator worth checking out.
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