Deciding whether to rent or buy your next home will come down to a number of different factors. First of all, timing and availability of funds will make a huge difference in whether you will qualify for a loan or not. This may be a primary consideration for millennials as they graduate from college and begin to build their own futures. However, a more objective study of current rental and pricing rates shows that purchasing a home is still the better option for most people if they have the opportunity.
Price-to-Rent Ratio
The price-to-rent ratio is a comparison of housing prices versus rental rates for same size properties in specific markets. This number makes it very easy to see whether renting or buying is more cost effective in a given city. This ratio can also be used to measure trends in both the buying and renting markets over time. The lower the ratio, the better time it is to make a home purchase. For instance, the price-to-rent ratio in January of 2012 was approximately 9.9, which was roughly 71% of where it was in the pre-housing bubble peak of 2007. As of the most current data for June of 2015, the price-to-rent ratio remains about 11% below it’s peak, but has been steadily climbing as the housing market recovers.
The Trend
During the peak of the housing market, both rental and purchase prices of houses got exorbitantly high. However, after the housing bubble burst, purchase prices fell drastically, but rental rates took a much smaller hit. In fact, the rental market overall remained fairly steady, and benefited by the number of people who lost their homes to foreclosure and were forced back into the rental sector. As a result, demand for rentals grew and rental rates overall climbed back to their previous rates quickly. Once home purchases began to recover and housing prices started to rise again, rental prices continued to rise with them. Today, the current rental rates remain above purchases prices overall. One of the biggest contributors to this trend is the lower interest rates being offered by lenders today. Unfortunately, interest rates are going to rise as the housing market recovers, so eventually purchase prices will meet rental rates once again.
What Now?
As long as interest rates remain low and housing prices stay below rental rates, now is the time to buy. Lenders are beginning to add some flexibility to their loans once again and there are numerous programs available for first time home buyers. It will probably still take several years for most housing markets to reach the same point as rental rates, so there is still ample time to explore your options and find a new home in your price range.
For more mortgage industry news and trends stay tuned to DaveKevelighan.com.
