Homeownership Gains Favor with Rising Rental Costs
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As the economic recovery gets underway, many experts are predicting the rental market is going to get tighter, a result of people ditching their roommates and moving out of their parents’ basements. Families who lost their homes during the foreclosure crisis will also be looking for rentals as they get back on their feet.
Peggy Alford, president of Rent.com, recently told CNN Money that rental demand is already increasing. Rental vacancy rates for the U.S. are currently under the 10 percent mark, according to Census data, but Alford said they could dip to 5 percent. This means there will be fewer rentals available, which would result in rising rental costs. In fact, data company Reis, Inc. is projecting U.S. rental prices will increase by 3.4 percent by the end of the year. Rising inflation could also push prices higher.
In recent data from the U.S. Census Bureau, the rental vacancy rate dropped significantly. During fourth quarter 2010, the rental vacancy rate in Utah was 4.4 percent, compared to 8.7 percent in 2009. In the Salt Lake City metro area, the vacancy rate was 5 percent compared to 9.9 percent during the last three months of 2009.
Rising rental costs are likely to push a number of consumers toward homeownership. With home prices at low levels and interest rates still at historically low levels, many people may find that buying a house is cheaper than renting.
When deciding to purchase a home, potential buyers not only look at what their monthly payments would be, but how much it would cost to rent a comparable property. It’s called the price-to-rent ratio, and many economists use it to predict what will happen to home values in the future. When the cost of renting is more than or close to the cost of homeownership, people tend to buy. When renting is cheaper than buying, people tend to rent.
In Trulia’s January Rent vs. Buy Index, the real estate search company found it is more affordable to buy than to rent a two-bedroom home in 72 percent of America’s 50 largest cities.
“Since the start of the ‘Great Recession,’ many former homeowners have flooded the rental market,” said Pete Flint, CEO and co-founder of Trulia, in a press release about the index. “Following the principles of supply and demand, renting has become relatively more expensive than buying in most markets.”
The company calculates the data with a formula used by economists. To determine whether it’s cheaper to rent or buy, they divide the purchase price of a home by the annual rent of a similar property. Using this rough gauge, experts recommend buying when the number is below 15. When the number is between 16 and 20, the company says the costs of homeownership are greater than renting, but it still may make sense to buy. If the number is above 21, the costs of renting are much less than buying.
Although no Utah cities were featured in the Trulia report, third quarter 2010 data from Moody’s Analytics for Fortune found that the rent ratio in Salt Lake City was 18, meaning renting or buying will depend on the situation. However, that number could go even lower in favor of homeownership during the coming year.
“By mid-2011 and certainly by the end of 2011, buying will be superior to renting in most parts of the country,” Mark Zandi, Moody’s chief economist, told Fortune.
Homeownership may also become more desirable because of several unexpected costs of renting. An article from SmartMoney, “The New Costs of Renting,” said storage unit costs, which could be upwards of $100 a month; rental insurance, which anecdotal evidence suggests more landlords are requiring; and missed opportunities could make buying more attractive.
Because the purchase and rental market will vary from neighborhood to neighborhood, potential buyers should talk to their Realtor about whether owning or renting is cheaper. There are many online rent-vs.-buy calculators that can also provide a starting point for comparing costs.
March 19, 2011 | Share: