St Louis Makes Top 10 List For Places Where It’s Cheaper to Buy Then Rent

Even with rising home prices and interest rates that are following suit, it’s cheaper to buy then rent both on a national level as well as in all of the 100 largest metro areas, according to a report just released by Trulia. According to the report, nationally it is 38% cheaper to buy than rent and in St Louis, it is 54% cheaper to buy then rent putting St. Louis at the #10 spot on “Where Buying a Home is a No-Brainer” list.  See below for the complete list of the top 10 no-brainer to buy cities as well as the 10 cities where buying a home would be a “risky proposition”.

Continue reading “St Louis Makes Top 10 List For Places Where It’s Cheaper to Buy Then Rent

Number of homeowners becoming tenants on the rise

Saint Louis Realtor, Dennis Normanst-louis-real-estate-realtor-dennis-normanOver 35 percent (35.1) of tenants were previously homeowners, according to a survey by Apartments.com conducted in the 4th quarter of 2012.  This is a fairly significant increase from a year ago when  33.6 percent of tenants reported they were previously homeowners.  The most common reasons given for the change from homeowner to tenant were affordability and the flexibility in location.  While it was just 5th on the list, it is worth noting that the loss of a home due to foreclosure or divorce increased nearly 90 percent in the past year as a reason for converting from homeowner to renter.

Top Five Reasons Why Previous Homeowners Now Rent: Continue reading “Number of homeowners becoming tenants on the rise

Homeownership in St. Louis is 53 percent cheaper than rent according to Trulia report

saint-louis-real-estate-dennis-normanShould I rent or buy a home in St Louis?  This is a question that I’ve been asked dozens of times over the past couple of years and one that given the fact that home affordability is at an all time high and mortgage interest rates at an all time low, is generally easy to answer with “buy if you can”.  I guess I many not have realized just HOW much sense that made financially, until a report came out a few days ago that looked to answer this very question and found that home ownership was 45 percent cheaper (on average) than renting in all 100 largest metro areas in the U.S.  In St. Louis, with an average monthly cost of home ownership of $593 and rental cost of $1,251, according to Trulia1, there is 53 percent less cost owning a home versus renting a home.
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1Trulia looks at homes for sale and for rent and calculates the average rent and sale price across all listed properties in a metro area. Then, Trulia factors in the total costs of homeownership (e.g., closing costs, maintenance, insurance, taxes, etc) and total cost of renting (e.g., renter’s insurance and security deposit). The starting assumptions are that a prospective homebuyer can get a low mortgage rate of 3.5 percent, itemizes their federal tax deductions, is in the 25 percent tax bracket, and will stay in their home for seven years. People in the 35% federal income tax bracket are also assumed to pay 5% state income tax. To account for the opportunity costs, Trulia calculates the net present value of the payment streams for renting and owning.

St. Louis Mortgage Rate Update; Should you Rent or Buy a Home?

Until recently, home ownership was no bargain compared to renting, according to Paul Diggle, a housing economist at Capital Economics.

Recent data from the U.S. Census Bureau and published statistics from Thomson Datastream indicate that rising rents and falling mortgages are tipping the scales towards home ownership.  The median monthly mortgage payment has fallen to about the same as a median monthly rent check. Continue reading “St. Louis Mortgage Rate Update; Should you Rent or Buy a Home?

Buying a home more affordable than renting in three out of four major cities

Dennis Norman St LouisA report released by Trulia shows that, based on current market conditions, it is cheaper to buy a home than rent in 74 percent of major U.S. cities. At the top of the list is Las Vegas with a price rent ratio of 6 (the lower the number, the more affordable it is). At the other end of the spectrum, New York city leads the list of cities where it is cheaper to rent than buy with a price rent ratio six times higher than that of Las Vegas. Continue reading “Buying a home more affordable than renting in three out of four major cities

Buying a home more affordable than renting in four out of five major cities

Dennis Norman St LouisA report released this morning by Trulia shows that when it comes to the question “should I rent or buy” the answer is to buy in 80 percent of the 50 largest U.S. cities. Trulia’s “Rent vs. Buy Index” compares the cost of buying and renting a two-bedroom apartment, condominium or townhouse and for the 2nd quarter of 2011 this index shows that buying is the way to go from an affordability standpoint for most areas….the only cities where renting was cheaper than buying were New York, Fort Worth and Kansas City. Continue reading “Buying a home more affordable than renting in four out of five major cities

College Parents Buying Homes vs Rent or Dorms

Dennis Norman

A study by Coldwell Banker Real Estate LLC shows that this fall as parents said goodbye to their college-bound kids, fewer of those kids were heading to dorms or apartments that are typically associated with college housing but instead will be heading to homes their parents bought for them to live in.  In fact, 64 percent of real estate professionals in college towns surveyed said they had seen a significant number of “parent investors” buying homes for their kids to live in while attending college. Continue reading “College Parents Buying Homes vs Rent or Dorms

What to do in 2010: Rent or Buy a home?

Five questions every potential buyer should ask when deciding whether to rent or buy a home

First time homebuyers have a lot to consider this summer when making the decision to rent or buy a home: interest rates are at all-time lows, there’s still plenty of housing stock and prices are at or near their lowest in years. Still, deciding whether to buy a home or rent an apartment can be a complicated decision. How do you know what’s right for you? Potential buyers should ask themselves several key questions before making this important decision. Continue reading “What to do in 2010: Rent or Buy a home?

7 Reasons to Rent Instead of Buy a Home

joe plemon

Joe Plemon, ChristianPF.com

Owning your own home may still be the great American dream, but, the influx of foreclosures in recent years has made it a nightmare for millions.  If you are considering purchasing a home, I challenge you to at least think through the advantages of renting before you buy.  Here are a few.

1. Less risk

Strangely, risk seems to be the factor least considered Continue reading “7 Reasons to Rent Instead of Buy a Home

Cities where home ownership is more affordable than rental

Dennis Norman

Today, Trulia released it’s “Rent vs. Buy Index” which established a price-to-rent ratio for the 50 largest cities in America (by population), then, based upon that ratio, determined which cities it makes more sense (financially) to rent versus buy. Continue reading “Cities where home ownership is more affordable than rental

Should You Buy A Home Or Rent? Top 10 Cities Where You Should Rent

Dennis Norman

Last month I did an article, “Should You Rent Or Buy A Home?“, in which I discussed a survey that was done by the National Apartment Association which indicated 76 percent of consumers surveyed believed renting to be a better option than home ownership. Well, today Trulia released it’s new “Rent vs. Buy Index” which established a price-to-rent ratio for the 50 largest cities in America (by population), then, based upon that ratio, determined which cities it makes more sense (financially) to rent versus buy.

Trulia Trulia real estate searchThe index looks at the total cost of home ownership on a monthly basis in each city, including what the house payment would be on a 2 bedroom home at the average list price, plus the cost of property taxes, homeowners insurance, closing costs at the time of purchase, home-owners associations dues and, where applicable, private mortgage insurance. They then compared this to the average monthly rent in the same city for apartments, condominiums and town-homes, then computed the ratio between the two numbers.

The tables below first show the top ten cities to rent in vs buy, followed by the top ten to buy versus rent based upon the Trulia Index (for price/rent ratios of 1-15 it is best to buy, 21 or above it is best to rent and for that 16-20 range it is still more expensive to buy than rent, but the “premium” paid for home-ownership may be worth it, depending on the consumers situation).

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Source: Trulia Rent vs. Buy Index

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Source: Trulia Rent vs. Buy Index

 

 

Should You Rent Or Buy A Home?

New Survey Finds 76 Percent of Consumers now Believe Renting to Be a Better Option Over Homeownership

Advantages Cited Include Flexibility to Move to a Different Location with New Job Opportunities

Dennis Norman

Last month I did a post addressing housing affordability, the cost of renting versus owning a home, and whether the real estate market over the past couple of years was causing the idea of home ownership as the “Great American Dream to “lose some of it’s sizzle?

For this reason I found a survey, conducted by Harris Interactive and commissioned by the National Apartment Association, that came out today particularly interesting.   The survey found 76 percent of consumers deem renting to be the more favorable option to owning a home in the current real estate market, a 5 percent increase from 2008. The survey also found that both renters and homeowners are not eager to make any changes in their housing status within the next year, demonstrating low consumer confidence and continued uncertainty in the housing market.

“While some may want to declare the housing crisis over, consumer patterns of behavior are showing otherwise,” said National Apartment Association (NAA) President Douglas Culkin. “The findings in this survey mirror what our members are seeing throughout the country, especially in areas of the country that are experiencing the first signs of economic recovery.”

Highlights from the survey:

  • 76 percent of adults feel that there are advantages to renting versus owning in the current real estate market, an increase of 5 percent from 2008.
    • 64 percent cited having no responsibility for major repairs or maintenance as the primary reason.
    • 50 percent cited financial reasons such as not being impacted by an unpredictable real estate market (33 percent – an increase of 1 percent from 2008), and not being susceptible to foreclosure (tied at 33 percent).
  • Renters are not eager to make a change this year: 60 percent of renters plan to continue renting their current residence or rent new residences within the next year.
    • 12 percent of renters said they have plans to buy a new home this year and only 14 percent believe that buying a house is preferable to renting given the current state of the market.
  • 71 percent of homeowners will stay in their current home over the next year, mirroring almost exactly the response from 2008 (72 percent).
  • 93 percent of adults feel that the financial security of homeowners is more or equally affected by the current state of the housing market – no change from 2008 – illustrating that the economic impact of the foreclosure crisis has not shifted or improved.

“The results are yet to be seen if the tax-credit incentives worked, but the larger issue remains that pushing the idea of homeownership as the only way to achieve the American Dream is not a viable strategy for the future,” NAA’s Culkin said.

I’m not saying that home ownership is for everyone, nor is leasing, but I think the facts in my post last month I mentioned at the outset of this post as well as this survey show that perhaps the tide is changing; over the past 3 years millions of  Americans have lost homes in foreclosure, others have been forced to do short sales or deeds in lieu….it’s hard for this type of experience not to change your outlook.  It may very well be temporary or short-lived though…afterall how many people do you know that go through an ugly divorce and in the end want nothing to do with the thought of ever being married again…..only to turn up married a year down the road?

Who knows, a year or so from now, when the memories of the real-estate market induced pain and suffering has faded, we may all fall in love with the idea of home ownership again….

Homes are affordable; Should you buy? Rent? Do home prices need to fall further?

Dennis Norman

I thought I would end the week by giving everyone something to dwell on and contemplate over the weekend. Actually, I set out this morning to do a post about the National Association of REALTORS(R) (NAR) Housing Affordability Index for February which was recently published. As I was reviewing the data in the report I started giving “affordability” a lot of thought, went down a few rabbit trails, did a few hours of research and ended up with an analysis of home affordability.

The NAR Report:

Since this was the initial topic I thought I should say a little about it. The NAR Housing Affordability Index for February was at 176.0 meaning that a median-income family has 176 percent of the income they need to purchase a median-priced house, which is good. This is down slightly from January’s index of 177.5 but is still a vast improvement from a couple of years ago when it was 115.4 in 2007 (the higher the number the better).

This is where I started digging in a little though. There are several factors that play a role in the index: median home prices, mortgage rate and median family income. Since 2007 median family income has dropped about 1 percent which has very little affect on affordability however interest rates have dropped from 6.52% in 2007 to 5.13% in February, a decline of over 21% and home prices have fallen almost 25% during the same period so it’s not surprising that homes are more affordable, particularly since the index uses the house payment to determine affordability.

Low interest rates – how much of a factor?

The NAR index is based upon a monthly payment of $1,104 on a median priced home in 2007 and a payment of $716 on a median-priced home in February 2010; a decrease of $388 in payment over the period. So how much of a role did interest rates play in the decrease? Well, lets put it this way; if in 2007 the rates were 5.13% as they were in February the payment on a median priced home would have been $950, $154 less than it was. And, if interest rates now were 6.52 like they were in 2007 then the payment on a median priced home would be $833. So if we take do an apples to apples comparison with regard to interest rates, then the lower home prices have resulted in a monthly savings of $117 instead of $388. Hmm…

interest-rates-89-09In the chart to the right you can see mortgage interest rates for the past 20 years and can see just how low rates are today, about half of what they were 20 years ago. The median interest rate for the 20-year period of 1989 – 2009 is 7.31% which should remind us that rates will most likely not stay as low as they are now.

So what happens if interest rates go up, say back to the 20-year median rate of 7.31%? Well, going back to NAR’s affordability index, if we apply that rate to the current median home price used in the index the payment goes from $716 to $902, an increase of $186, or 26% which I would say is significant and would chop NAR’s affordability index down a chunk.

Here’s the scary part: home affordability is not far off an all time high and we have incentives such as home buyer tax credits, and yet home sales are dragging along at depressed levels which tells me we can’t afford to have housing affordability go the other direction.

If interest rates increase how much would home prices have to fall to keep affordability the same?

OK, let’s say, that in spite of what the government is telling us, interest rates go up, maybe even up to the 20-year median rate of 7.31%, what would have to happen to prices to keep affordability the same? Well, assuming the median family income stays the same, the median home price would have to drop from the February price of $164,300 to $130,418, a drop of almost 21%, in order to maintain housing affordability where it is now. Make a mental note of that price drop and read on please.

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Relationship between rent and home prices

As home prices shot up during the boom one thing that hit me was that rental and lease rates on homes were not increasing at nearly the same rate and prices on rental property seemed to be way out of whack with the income. Last year I wrote a post and told a story of my wife and I searching for a condo in Florida in 2003 to buy for a vacation rental and finding that the relationship between the prices and the income was nuts….it made no sense at all what people were paying. Since then I have seen several articles by people much smarter than me that have discussed the relationship between the “rental value” of a home and it’s sales price and when this gets too out of whack something breaks….home prices.

During the boom this was clearly evident…One example I remember is there was a developer in Clayton, an ecclectic, upscale neighborhood in St. Louis, MO, that built a wonderful new home in a transitional neighborhood and offered it for sale at $1.6 million. The house was well worth the money but, since this was a “tear-down” in an older neighborhood of much more modest homes, the price was significantly higher than the neighboring homes. Long story short, the builder couldn’t sell it, so he offered it for lease, first for around $5,000 a month, then later $3,500 and leased it. I remember doing the numbers then and thinking what a bargain leasing the home would be versus owning it. If you bought the home at the time, put 20% down ($320,000) you would have a payment of $7,567 plus taxes and insurance, so probably around $9,000 a month by the time you were done. Or, you could put down a security deposit of $3,500 and lease it for $3,500 a month. The lease route saved you $316,500 in cash up front and about $5,500 a month versus buying the home which made me realize either rents were way too low or prices too high…reality is it was probably a little of both.

median-rent-sale-priceI decided to take a look at the relationship between median rental rates and median home prices over the past 20 years to see if this data might help me understand where things stand.

Playing economist I developed a price/rent ratio based upon median home prices’ relationship to median annual rental rates. As you can see in the chart to the right, this ratio was in the 13 to 14 range from 1989 through 1995 then inched up to the 15 to 16 range until 2005 when it shot up into the mid-20’s and then settled at 18.47 in 2009.

Home prices are still too high

The chart below shows my price/rent ratio over a 20 year period and shows the median for the period in red. From about 1996 until late 2003 the ratio was right at the median and I think there was a balance between rent and home prices. However, in 2004 home prices shot up and, even though, as the chart shows, started a decent in 2007, are still above the median range indicating to me that home prices are still too high. For 2009 the median home sales price (based upon census data) was $156,900 but in order to bring the price/rent ratio back in line with the “normal” period of ’96 through ’03, the median home price would need to be around $134,842, a decline of another 14 percent or so.

home-annual-annual-rent-ratio

house with american flagThe American Dream

Home ownership has, for as long as I can remember, been referred to as “the American dream” while at the same time renting or leasing a home has, by many people, been looked upon as a last resort or something not for them. Well, guess what? Times are changing! I should stop now and interject the fact that I am a REALTOR(R) and very much want people to buy homes, but the honest truth is that may not be the best alternative for everyone at this time. Our country is at a very volatile point in many regards and we have experienced the worst economy since the great depression….these are not normal times.

While, short of God, no one can, with certainty, say what is going to happen to home prices over the next decade, I think it is safe to say that any appreciation we may see will be modest until our economy is back on track which may be some time. In the meantime I wonder if leasing a home may become a more popular option for people, even prior homeowners, that don’t want to risk the financial anguish and pain they may have felt over the past couple of years again, and may instead choose to look at providing shelter for their family from more of a business standpoint….in other words, where will they get the most bang for their buck…owning or renting?

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