With mortgage rates at near historical lows, is now the time for renters to take the plunge into homeownership? We all know the cost of housing is expensive in the Bay Area, regardless if you’re renting or buying. Calculating the cost/benefit can be a challenge. Let’s take a look at the math.
Calculating the Factors
There are several numbers to crunch when deciding between renting and owning real estate, including these financial factors:
- Home price
- Estimated number of years you’ll stay in the home
- Mortgage rate
- Down payment amount
- Mortgage length
- Average appreciation rate
- Rent growth rate
- Investment return rate (the opportunity cost if you invested your money elsewhere)
- Inflation rate
The New York Times has an interactive calculator where you can run different financial scenarios. Let’s run through an example for a home in the Bay Area.
The median home price in Santa Clara County is about $1M. According to the U.S. Census Bureau, approximately 12% of the population moves each year. Let’s say you’ll stay in your home for at least 5 years and you’ve saved enough for a 20% down payment. Assuming a mortgage interest rate of ~4% that’s fixed for 30 years, your monthly payment is about $3,820 without taxes and insurance. Adding ~1.25% ($12,500) for property taxes and $1,000 annually for homeowners insurance, your total house payment is $4,945.
Digging deeper into our example, let’s add these other factors in the calculator:
- A home appreciation rate of 4% (in Santa Clara County homes appreciated ~10% 2015).
- Average rent growth rate of 3% in the nine-county Bay Area was up 7% from 2015 levels. However, it looks like rents may be falling.
- Rather than invest your $200,000 down payment into real estate, you could earn 1.3% in another type of investment.
- A 1% inflation rate (according to the U.S. Stat Bureau).
- A conservative marginal tax rate of 25%.
- Estimated closing costs are 5% off the purchase price. Let’s also assume you’re a first-time home buyer so you have $0 costs for selling a home.
- Miscellaneous fees: 1% maintenance and $1,000 homeowner’s insurance and average utility bill of $200, no HOA/condo fees, one-month rental security deposit and $200 renter’s insurance policy.
Using the NY Times calculator, if your rent for a similar home is $1,261 a month, then renting is better. Most likely your rental costs are much higher than this figure. According to the Mercury News Business article published in January 2016, the average monthly rent for a San Jose apartment is $2,436. Of course the elephant in the room is saving for the 20% down payment.
The Brexit Blip & Predictions About Mortgage Rates
When the Brexit story hit the news, the mortgage market had some notable downward fluctuations. Overall rates bounced back to pre-Brexit levels. However, it’s important to keep perspective — they are still at historical lows. Some analysts think the mortgage rates will take another dip in the fall. In my experience, buying the right home is more important than trying to time the market and a mortgage rate.
There are so many variables when purchasing a home, including competing against multiple offers and choosing within low inventory in your desired neighborhood. My advice is to get pre-approved by a local lender based upon your current financial situation. Once we have this information, we can figure out your best housing options.
Have you done the calculations? Is it time to make a move? Give me a call and I can help you connect with a local lender and crunch the numbers.