To rent or to buy a home?
Mortgage interest rates are at historic lows and rents are rising.
Published: Friday, May 4, 2012 at 11:05 a.m.
Kirk Fields did the math.
He was renting in Wilmington for $1,000 a month.
Now Fields owns his own house – a three-bedroom, one-bath brick with around 1,100 square feet situated on a quarter acre in Castle Hayne.
Renting that home would have cost him $825 a month.
But Fields said his mortgage, taxes and insurance cost him hundreds of dollars less than that.
It made sense, he said, to buy, even at his tender age of 21.
It's the same for a lot of people now, said Michael Otelsberg, of Century 21 Sweyer & Associates, who was Fields' real estate agent.
Why? Mortgage interest rates are at historic lows and rents are rising.
The housing climate
Demand for rental houses and apartments has increased and much of that stems from the housing bust and a weak economy.
Those who have lost their homes to foreclosure have been forced into the rental market. Those who don't have a down payment or a credit score high enough to qualify for a mortgage don't have much of a choice.
Still other would-be buyers choose to rent from fear, after witnessing the housing debacle of the last several years.
In fact, the number of Americans who own their homes dropped a full percentage point over the last year, to 65 percent in the latest quarter, according to U.S. Census Bureau data. It's the lowest rate since 1997.
"People are beginning to question the absolute certainty of building wealth" through homeownership, said Julian Diaz III, chairman of the Department of Real Estate at Georgia State University's J. Mack Robinson College of Business.
"When we were building the bubble, everyone assumed that (a home) was a wonderful investment."
But the arguments to own remain strong.
Diaz emphasized that owning a home "still is a solid way to build wealth if done wisely and carefully."
A house built and sold 10 years ago, Otelsberg said, will show a 5 percent to 10 percent return on investment, despite the plunge in values in the interim.
Interest rates are at record lows. This week's average for a 30-year, fixed-rate mortgage was 3.84 percent, according to Freddie Mac's latest weekly survey.
"The interest rate being sub 4 percent is what is driving the sales," said Buddy Blake, owner of Re/Max Essential in Wilmington.
"This is the first time since 2007 when you could tell someone that it is cheaper to buy than to rent."
It's not just real estate agents who want you to own.
The government offers incentives in the form of liberal tax breaks, said Norman Block, an adjunct real estate professor at the Kenan-Flagler Business School at the University of North Carolina Chapel Hill.
Blake gave an example of a three-bedroom, two-bath home in Leland that currently is for sale for $129,900 and for rent at $900.
He calculated that the total monthly payment for mortgage, taxes and insurance would be $712.25 versus rent of $930, including renter's insurance.
Including the tax advantages of owning and assuming a rent increase of 2.5 percent, at the end of seven years the payments work out to about $1,000 to rent, but only about $570 in buy.
There's a total tax savings in those seven years of $12,260.
"If you look at your total (housing) payment, the majority is interest and tax," both of which are deductible on your federal income taxes, Block said.
Block gives other factors beyond the tax deductions that favor owning over renting.
"A little part of each payment is repaying the loan, building up equity in a house," he said. "Those are dollars that you will see again someday" when you sell.
In fact, you will be paying back principal faster at today's interest rates than those historically more common, like 6.5 percent to 7 percent, Otelsberg said.
Block also points to appreciation, something we've seen very little of in recent years.
"As the economy recovers, we're going to go back to seeing some appreciation in value that accrues to the owner."
But the barriers to owning remain strong as well.
"The biggest struggle is credit scores," Blake said. "The requirements to get a loan have changed significantly.
"If you had a 580 to 600 (score), you could get a loan. Now it's 640."
Fields, however, made the grade.
New mortgage requirements by the FHA and USDA are a potential barrier to perhaps half of the people who want to buy, he said.
Minimum requirements to qualify for a mortgage used to be much more liberal. Now "the pendulum has swung too far the other way," Blake said, "so it's forcing a lot of people to rent."
Then there's the down payment, often at least 10 percent. Qualified buyers in the Wilmington area, however, can get FHA loans for 3 percent down and USDA rural loans with nothing down.
Renting had its own "down payment," Fields said. He had to pay two months' rent to move into his Wilmington apartment.
When he bought, Fields paid nothing down, using a USDA loan, which is available in all of Brunswick and Pender counties, and even parts of New Hanover.
Cost of ownership
Others warn to look beyond just the lower payments and tax advantages to the cost of ownership.
"On a brand-new home, somebody should be budgeting 2 percent or a bare minimum of 1 percent of the home price a year to some sort of reserve on home maintenance," said Michael Dubis, a financial planner and lecturer at the University of Wisconsin's James A. Graaskamp Center for Real Estate.
On a $150,000 home, that amounts to $1,500 to $3,000 – every year.
Still a buyer should break even if he or she stays in the home for three to five years, and that's assuming no appreciation, 2 percent homeownership costs and a 6 percent commission to sell the home, Dubis said.
The soft factors
If even it makes financial sense to own rather than rent, there are off-balance-sheet items that shape the picture.
It's what Diaz calls the soft factors.
One of those is mobility.
"A lot of people are in a situation where they have great job security, but if you are in a situation where you may be changing jobs ... you may not want to be in a position you cannot sell a home and get out from underneath a mortgage."
Where are you in life?
"Life stage is a big issue," Diaz said. "Young people tend to need mobility ... it may dictate whether you should rent or own. When you are a young couple with chlidren, maybe owning a home is the best thing," he said. "But young people tend to need mobility" to find employment, for example.
Even at 21, Fields knows what he wants.
He plans to finish up at Cape Fear Community College, where he's studying computer engineering.
Then he plans to buy another house.