Even though housing prices are increasing, in America’s biggest cities, according to a recent Forbes article, it’s still cheaper to own a house than to rent it. According a San Franciscan Real Estate site, Trulia, nationally on average it’s 35% cheaper. In cities, where prices and rental rates are notoriously higher, it’s still cheaper (9% in San Francisco and 21 percent in New York).
In some ways, this shouldn’t be surprising. Nobody would buy a house if it was cheaper to rent. Nonetheless the gap between buying and renting is continuing to narrow at a rapid rate. A year ago, it was 45% cheaper to buy than to rent; now it’s 35% (as mentioned above). Of the 100 largest metros tracked in the last year, all but one had the cost of buying move closer to the cost of renting.
The culprit of the narrowing gap are rising mortgage rates. Since the financial crisis, subprime mortgage rates are no longer a norm. People have to pay more to own a home. In addition, with the federal reserve considering its 85 million dollar bond buying program (known as QE3), investors want to keep mortgage rates high now in case they lose out on the new sales later. We have yet to see if these how high these rates will increase.
The 30 year mortgage rate now averages 4.5 percent. Every percent increase in the rate can lead to a city going over the tipping point. At 5.2%, San Jose, Califorina will swing toward renting. It will happen in Honolulu, Hawaii at 5.8%. After those two, more and more should tip over. However, the rate will have to be double digit before we see a situation where it’s cheaper to rent than to buy nationally.
While the gap is still fairly wide, the narrowing margin is something for those in the real estate business to keep an eye on.