In Trulia’s latest Rent vs. Buy Report, they explained that homeownership remains cheaper than renting with a traditional 30-year fixed rate mortgage throughout the 100 largest metro areas in the United States.
The updated numbers actually show that the range is from an average of 17% in Honolulu, all the way to 63% in Detroit, and 38% Nationwide! This is up from an average of only 5% cheaper in Honolulu in April.
The other interesting findings in the report include:
- Rents have continued to increase nationally even as home price increases are starting to slow. Current low mortgage rates have kept homeownership from becoming more expensive than renting.
- Some markets might tip in favor of renting next year if home prices increase at a greater rate than rents and if – as most economists expect – mortgage rates rise, due to the strengthening economy.
Nationally, rates would have to rise to 10.6% for renting to be cheaper than buying – and rates haven’t been that high since 1989.
Buying a home makes sense. Rental costs have historically increased at a higher rate of inflation. Lock in a mortgage payment now before home prices and mortgage rates rise as experts expect they will.
A recent study by the Joint Center for Housing Studies at Harvard University revealed when renters were asked why they do no plan to own in the future, financial constraints were a more common response than the perceived lifestyle benefits they may receive from renting. Today, we want to go over those financial challenges and see if we can put some fears to rest and also clear up some misconceptions. Here are the top four financial hurdles that cause renters not to buy:
You Cannot Afford a Home
Well over 50% of renters consider this as a financial barrier to homeownership. However, study after study has shown us that there are major misunderstandings about what is required to purchase a home.
The biggest misconception is the amount of a down payment required. A recent survey revealed that 44% of respondents believed that a 20% down payment was required. In actuality, mortgages are available with as little as 5% down (and even 3% in certain situations).
The same survey showed that 30% of respondents believe that only individuals with ‘high incomes’ can obtain a mortgage. In actuality, there are several programs intentionally created to help moderate income families buy a home of their own (look at the FHA program for example).
You Do Not Have Good Enough Credit to Get a Mortgage
The survey mentioned above showed that 64% of respondents believe they must have a “very good” credit score to buy a home. Most people don’t realize that the average credit score for closed loans has actually dropped 24 points in the last two years. For more information on credit scores click here.
It’s Not a Good Time to Buy a Home
Determining when is the right time to buy a home from a pure financial calculation can be difficult. There are two elements of the cost of a home: the price of the house and the mortgage interest rate. When considering a purchase, you want to have at least an indication where prices and mortgage rates are headed. According to over 100 experts, house values are expected to increase by almost 20% between now and 2018. And Freddie Mac recently projected that mortgage rates would be as much as one full point higher by this time next year.
With both prices and interest rates projected to increase, now is the perfect time to buy a home.
It’s Cheaper to Rent than Buy
This is a myth that doesn’t want to die. However, Trulia recently reported that, in fact, buying is actually dramatically cheaper than renting. Here is what they said:
“Homeownership remains cheaper than renting nationally and in all of the 100 largest metro areas. In fact, buying is 38% cheaper than renting now, compared with 35% cheaper than renting one year ago.”
If you are even thinking about buying, get the facts from a trained professional. You may be pleasantly surprised by what you find out.
There are some people that have not purchased a home because they are uncomfortable taking on the obligation of a mortgage. Everyone should realize that, unless you are living with your parents rent free, you are paying a mortgage – either your mortgage or your landlord’s.
As a paper from the Joint Center for Housing Studies at Harvard University explains:
“Households must consume housing whether they own or rent. Not even accounting for more favorable tax treatment of owning, homeowners pay debt service to pay down their own principal while households that rent pay down the principal of a landlord plus a rate of return. That’s yet another reason owning often does—as Americans intuit—end up making more financial sense than renting.”
Also, if you purchase with a 30-year fixed rate mortgage, your ‘housing expense’ is locked in over the thirty years for the most part. If you rent, the one guarantee you will have is that your rent will increase over that same thirty year time period.
As an owner, the mortgage payment is a ‘forced savings’ which will allow you to have equity in your home you can tap into later in your life. As a renter, you guarantee the landlord is the person with that equity.
Whether you are looking for a primary residence for the first time or are considering a vacation home on the shore, owning might make more sense than renting since home values and interest rates are still at bargain prices.
Some homeowners may consider trying to sell their home on without the assistance of a real estate professional, known in the industry as a For Sale by Owner (FSBO). We think there are several reasons this might not be a good idea for the vast majority of sellers.
Here are five of our reasons
1. There Are Too Many People to Negotiate With
Here is a list of some of the people with whom you must be prepared to negotiate if you decide to FSBO.
- The buyer who wants the best deal possible
- The buyer’s agent who solely represents the best interest of the buyer
- The buyer’s attorney (in some parts of the country)
- The home inspection companies which work for the buyer and will almost always find some problems with the house
- The appraiser if there is a question of value
- Your bank in the case of a short sale
2. Exposure to Prospective Purchasers
Recent studies have shown that 92% of buyers search online for a home. That is in comparison to only 28% looking at print newspaper ads. Most real estate agents have an extensive internet strategy to promote the sale of your home. Do you?
3. Actual Results also come from the Internet
Where do buyers find the home they actually purchased?
- 43% on the internet
- 9% from a yard sign
- 1% from newspapers
The days of selling your house by just putting up a sign and putting it in the paper are long gone. Having a strong internet strategy is crucial.
4. FSBOing has Become More and More Difficult
The paperwork involved in selling and buying a home has increased dramatically as industry disclosures and regulations have become mandatory. This is one of the reasons that the percentage of people FSBOing has dropped from 19% to 9% over the last 20+ years.
5. You Net More Money when Using an Agent
Many homeowners believe that they will save the real estate commission by selling on their own. Realize that the main reason buyers look at FSBOs is because they also believe they can save the real commission. The seller and buyer can’t both save the same commission.
Studies have shown that the typical house sold by the homeowner sells for $184,000 while the typical house sold by an agent sells for $230,000. This doesn’t mean that an agent can get $46,000 more for your home as studies have shown that people are more likely to FSBO in markets with lower price points. However, it does show that selling on your own might not make sense.
Before you decide to take on the challenges of selling your house on your own, sit with a real estate professional in your marketplace and see what they have to offer.
We have recently reported on the misconception that many buyers have regarding the down payment necessary to purchase a home. Multiple studies reveal that 40-50% of Americans believe you need between 15-20% of a down payment to be eligible to purchase a home.
This misconception came about as the government just last year debated new guidelines for residential mortgages because of the housing collapse in 2007. Some were arguing that there should be a minimum of 20% or even 30% down payment on all mortgage loans. However, those standards were never implemented.
To counter this misunderstanding, Christina Boyle, Freddie Mac’s VP and Head of Single-Family Sales & Relationship Management, in a recent Executive Perspectives explained that a person “can get a conforming, conventional mortgage with a down payment of as little as 5 percent”.
3% Down Payments Available Soon?
Just last week, Federal Housing Finance Agency Director Mel Watt announced that mortgages requiring only a three percent down payment may soon be available:
“To increase access for creditworthy but lower-wealth borrowers, FHFA is also working with the Enterprises to develop sensible and responsible guidelines for mortgages with loan-to-value ratios between 95 and 97 percent. Through these revised guidelines, we believe that the Enterprises will be able to responsibly serve a targeted segment of creditworthy borrowers with lower-down payment mortgages by taking into account “compensating factors.”
If you are saving for either your first home or that perfect move-up dream house, make sure you know all your options. You may be pleasantly surprised.
The Gallup organization conducts an annual report entitled the Economy and Personal Finances Poll, which asks Americans to choose the best option for long-term investment.
It was no surprise that real estate returned to the top position over other investment categories (gold, stocks/mutual funds, savings accounts/CDs and bonds).
Back in 2011, gold was the most popular long-term investment among Americans. However, with the housing market improving across the U.S. and home prices rising, more Americans now consider real estate the best option for long-term investments.
The poll also revealed that real estate was considered to be the best long-term investment by all four subgroups by age and two out of three by income: