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Trulia: Buying Cheaper Than Renting In DC Until Rates Reach 9%

by Shilpi Paul

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Now that mortgage interest rates seem to be moving north rather quickly, everyone is wondering how much the increasing rates will impact housing affordability. So Trulia economist Jed Kolko recently crunched some numbers to find out how the rising rates will impact the ever-present rent versus buy debate across the country.

Kolko updated the numbers in Trulia’s Buy vs. Rent calculations, and played with interest rates until he found the “tipping point”: the number that, when exceeded, makes buy a pricier proposition than renting. Nationally, Kolko found that the scales wouldn’t tip in favor of renting until rates hit 10.5 percent. In DC, Kolko told UrbanTurf, buying becomes more expensive than renting when mortgage rates hit 9.1 percent. In nearby Bethesda, the number is 9 percent. While the number is lower in expensive areas like San Francisco and New York, in 78 out of the 100 largest metros, the interest rate tipping point is 10 percent or higher.

From Trulia:

Because mortgage rates are still near long-term lows, and because prices fell so much after the housing bubble burst and remain low relative to rents even after recent price increases, buying is still much cheaper than renting. The recent jump in rates doesn’t change the rent-versus-buy math much.

The buy-versus-rent analysis calculates the cost of buying and renting for two similar properties, including maintenance, insurance, taxes, closing costs, down payment (20%), sales proceeds, as well as mortgage payments on a 30-year fixed-rate loan and monthly rent. Trulia assumes that buyers will live in their homes for 7 years during which modest price appreciation will occur, and that the owners will deduct their mortgage interest and property taxes. They also calculate the net present value to account for inflation over time, which reflects the opportunity cost of tying up your cash in a down payment. For the full methodology, click .

While the Trulia conclusions are interesting and based on a pretty sound methodology, there is no way of telling the trajectory of home prices or rental rates from one year to the next (or even 7 years out), factors that will weigh heavily on whether or not the real estate site’s latest assessment proves to be true.

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This article originally published at http://dc.urbanturf.com/articles/blog/trulia_buying_will_remain_cheaper_than_renting_in_dc_until_rates_reach_9/7191

3 Comments

  1. Anita said at 9:33 am on Sunday June 16, 2013:

    This analysis seems to ignore two important factors in the DC market:

    1) There are a lot of rental units being delivered in DC over the coming months, which should push rents down relative to the cost to buy. 

    2) We’re seeing the rapid price appreciation in the DC home sales market which is going to continue to push up the cost of buying relative to renting. (Maybe price increases will slow as the economy improves and more people feel that they can sell their homes without losing money, but right now it’s a very supply constrained market which has pushed up prices.)

  1. uhh said at 10:11 am on Monday June 17, 2013:

    dear urban turf: we know that you really, really support the real-estate industry, and are probably financed by the real-estate industry—we get that. but running stuff like this—that buying will be cheaper until mortgage rates top 9 percent—well, that’s just absurd. no one believes that. and it really damages your credibility to run stuff like this. i mean, why don’t you just say buying will never ever ever be more expensive than renting?

  1. Jonathan angle said at 1:50 am on Tuesday June 25, 2013:

    Before buying any property if proper inspection is done on location and price then you can get good locations at low prices. Surveys can help you a lot just before buying any land or building.

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