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.
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.
- Interest Rates: The Difference a Month Makes
- Will Interest Rates Be Above 4 Percent By Mid-June?
- Trulia: Buying is 41 Percent Cheaper Than Renting in DC
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
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