June 1st, 2015 7:14 AM by Jackie A. Graves
Buying a home costs money. Lots of money.
There’s the down payment and the monthly mortgage payment and the maintenance
and taxes and the insurance and… Are you overwhelmed yet?
It might seem like so much that you just
want to put off the house hunt and sign that yearlong lease with your
landlord (even though he upped your rent 25% and will likely do the same next year).
But this is going to blow your mind: Even with all
of those costs, you still stand to save more than $200,000
over the next 30 years if you buy right now.
“But that’s over the course of 30 years!” you
say. “I’m thinking about my money right now!” you say.
Well, get this: Wait just one year,
and you throw nearly $19,000 in savings down the
drain. The penalties are so high because mortgage rates are forecast to
increase and because home prices are rising quickly, according to our
chief economist, Jonathan Smoke.
Yep, that’s right. There’s a financial benefit—and, similarly, a financial penalty—for every single day you
pay your landlord instead of your mortgage company. At a national level, the
30-year financial benefit of owning today is $217,726, according to our
economic data analysts, who crunched the numbers to determine the relative
merits of buying vs. renting. (Their work doesn’t capture qualitative
advantages such as more control over your living situation,
flexibility with pets, and, generally, more options—all things many
potential home buyers would argue are equally, if not more, important when
deciding whether to take the plunge.)
Postpone for one year, and you’re losing
out on an estimated $18,672 in savings. Delay for three years, and that figure
jumps to $54,879.
“We’re at a critical juncture: Rents, home
prices, and mortgage rates are all expected to rise significantly over the next
several years,” Smoke says. “That means the cost of delaying homeownership will
go up even more sharply, if you wait three years or even one. It’s much
like the decision to start contributing to a 401(k). Delay contributing and you
lose out on the compounding returns.”
‘Financial calculus’ confirms it’s wise to buy
Smoke and his team used a lot of factors to
come up with these estimates, and they made quite a few assumptions as well.*
For instance, they assumed that any money saved by renters would be invested,
and that the investment would enjoy a compound annual growth rate of 5%
(that’s consistent with conservative long-term expected market returns).
We know—these are some pretty big assumptions.
How many renters are actually saving and investing? But
we’re telling you about these assumptions, because the bottom line is this: Our
data team stacked the deck against owning and still came
out with eye-popping figures in favor of buying.
“The financial calculus confirms
it’s wise to buy—and buy as soon as possible,” Smoke says.
That’s because no matter how you slice it, you
can’t deny a few key facts that make the case for buying: Nationally, it’s
cheaper right now to buy than to rent, home prices are expected to appreciate,
and, while renting is subject to inflation, homeownership costs are locked.
In some markets, financial ‘penalty’ is over
But, as always, it depends on where you go.
For example, in Bismarck, ND, the
financial benefit of buying is actually negative. That means you’d
spend $12,350 more over the next 30 years to buy instead of rent. That’s because in places such as Bismarck, rents are low, and
while home prices have risen dramatically over the past few years, they aren’t
expected to rise much in the future. That seems like an incentive to buy,
right? Not necessarily. Think about this in terms of home appreciation. Because
home prices may have peaked for the foreseeable future, you don’t stand to gain
much from owning a house here.
The following markets have the least
financial benefit over the next 30 years:
1. Bismarck, ND: –$12,350
2. Dallas–Fort Worth, TX: $830
3. Grand Forks, ND–MN: $4,999
4. Kahului–Wailuku–Lahaina, HI:
5. Houston, TX: $8,951
But travel west to California and you’ll see
an entirely different picture. In Santa Cruz, for instance, you stand
to save more than $1 million over the next 30 years if you buy today. That’s
because both rent and home prices are skyrocketing, thanks to strong economic
drivers such as job growth, population growth, and household growth.
But it’s still hard to get a foot in the door:
A median-income household in Santa Cruz could afford less than 10% of the homes
available for sale there.
In order to realize a positive financial
benefit from buying a house, owners have to wait for “break-even time
periods”—when the transaction costs of buying and selling cancel out.
Nationally, that wait time is just over three years. In markets that have
higher home price to rent ratios, such as San Jose, CA, and New York City,
owners normally need to wait longer—as long as six to seven years.
“From a pure financial perspective, you have
to be committed to staying longer term,” Smoke says about those high-cost
markets. “That’s one of the reasons why rents are also high and getting
The 30-year financial benefit of owning in the
following markets exceeds $500,000:
1. Santa Cruz–Watsonville, CA: $1,006,413
2. Santa Rosa, CA: $883,068
3. San Jose–Sunnyvale–Santa Clara, CA: $782,144
4. Urban Honolulu, HI: $714,748
5. Napa, CA: $712,192
So, in some places you win, in
other places you lose. That kind of means it all balances out, right?
Nope, Smoke says: Nearly 90% of the markets
(335 of ‘em) produce a financial benefit of at least $100,000 from owning
over 30 years. In addition, almost a quarter of the nation’s
markets reap a financial return greater than the national average.
We’re not exactly math majors, but we’re
picking up what Smoke is putting down. It might feel challenging to come up
with a down payment, but we never saw the savings spelled out in such plain
language. So BRB—gotta go buy a
*Our data analysts used the following
assumptions to calculate the relative merit of buying vs. renting:
They factored in a 20% down payment with
a closing cost of 3%. Maintenance and annual improvement costs are 1%, and
the opportunity cost of capital is 5% (average U.S. investors required return
on equity investments).
They assumed a marginal tax of 25% and the
cost of selling a house is 8% of the sale price. Capital gains tax is
15% beyond $500,000 (for married couples). Rent brokerage is 1% of first
year’s rent and rent insurance is 1% of monthly rent.
By: Rachel Stults – To view the original
article click here