If Renting Consider the Advantage of Buying Now
By Dee Burnett of Prudential Network Realty
It’s never been a better time to buy! This isn’t an article to sway you because I’m a realtor. The hard data in Housing Affordability index in the chart below confirms this. Since the beginning of this year, median income, median home price and median mortgage rates have stayed in the 180 to 200 range-highest reading since 1971.
Here is a situation to consider: A family earns $60, 0000, about the national average. They are renting at $1000 per month. They are considering buying a home with a mortgage of $170,000, fairly close to the current national median home price.
At the current rate of 4.8 percent on a 30-years fixed rate mortgage, the monthly mortgage payment would be $891 per month!! Plus a measurable portion of the monthly mortgage payment goes towards principal reduction on the loan balance. Example- in the first year about $215 of the mortgage is for the principal payment, which is a forced-disciplined savings imposed on the home buyer. The remainder $676 is the pure interest payment to the bank. This is much better then the $1000 in rent that was tossed out the door. Each year the principal portion gets larger while the interest portion declines because of a steadily falling loan balance.
Fixed rate mortgage also means the monthly payment doesn’t rise during the term, hence-fixed. This example family could be paying $891 in 2041. Now factor in the cost of living, food prices and Gasoline price during that time. Then factor Rent. Starting with a base of $1000 per month, say rent was to rise by 3 percent. It will be $1344 in 10 years, $1806 in 20 years and $2427 in 30 years. You can see on the chart below the drastic price difference as the percent increases. Many economists are expecting 3% to 5% annual rent growth over the next two years.
When rents rise, there is also a tendency for home prices to rise. The chart below shows the rent (based on rental rent component of the consumer price index) and NAR median home price trend with the index set at 100 in 1980. Well, today, home price and rent ratio are pretty much back to historically justifiable levels. So it is reasonable to presume that any rent increase will also at some point lead to equal gains in home values.
If home values were to rise 5 percent (under rent growth assumption of the same) then the home value would rise to $178,500, translating into a gain of $8,500 in housing equity in the first year.
Be mindful that all real estate is local. This means local conditions, figures, rent growth projections, and analysis will significantly vary. If families like the home they are looking to purchase and are willing to stay well within there budget, now is a good time to buy!