To buy or to rent... the million dollar question. While the answer may differ from year to year and city to city, the answer in Washington DC and in 66% of other metropolitan areas right now is…BUY! But why?
View the real estate market as a twisting spiral -- with buying versus renting on opposite sides -- and you get some idea of the fluctuations that occur. Mortgage rates, housing stock and desirability of a given city all affect the spiral's position.
Today, according to an ATTOM Data Solutions report issued in January, in 66% of the major U.S. housing markets, or 540 counties, it's an optimal time to BUY. That's the case in Washington, D.C. Let’s look at the reasons:
You Spend Less of Your Paycheck
In the 540 counties across the US where it’s cheaper to buy than rent, monthly rent for a three-bedroom home costs 38.6% of wages, while a monthly house payment for a median priced home costs an average of 36.6% of wages. This 36.6% includes mortgage, property taxes and insurance.
You Take Advantage of Tax Breaks
The tax breaks for mortgage payments, property taxes and insurance can be significant, saving you thousands of additional dollars each year. Investopedia’s Top Tax Benefits to Buying a Home has even more details about types of interest and points that are deductible, and it all adds up!
You Freeze Your Monthly Payments
Washington home values have risen 5.6% over the last year, and Zillow predicts they will go up another 4.5% in 2017. According to Zillow, the current market climate is sizzling hot, and all indications point to a continuing uptick, in both DC proper and surrounding Maryland and Virginia communities. When you buy, you freeze those monthly payments for the next 30 years, but renters see increases month after month, year after year. And build equity!
The Million Dollar Answer: You Build Equity
When you pay a mortgage, you are making a real estate investment, one with steady and solid historical rates of return. These rates of return vary widely from year to year and city to city, but let's say you buy a $400,000 house. At even 3% annual appreciation, that house is worth more than $1,000,000 in 30 years, and your mortgage is zero. Now that's a great investment that renting won't give you. And it's an investment with traditionally less risk and volatility than the stock market. So while you save short term with lower monthly payments that don't increase over time, you save over the long term too.
You Lock in (Still) Low Mortgage Rates
In 1983, the average mortgage rate for a 30-year fixed mortgage was 13.25%! Our sub-4% rates have lingered now for nearly 5 years, and while they may be trending slightly upward, are still at record lows compared to all rates over the last 50 years.
With all these benefits to buying, renting could still be a better fit for you in a few situations:
- If you know that you are only staying in an area for a short time.
- If your rent is below market rates.
- If you live in a very expensive area, like San Francisco or New York.
- If you are moving to a new town and want some time to find just the right neighborhood, or school district, before buying.
- If poor credit prevents you from getting the best loan rates. Higher loan rates mean higher mortgage payments for 30 years. Renting for a while can allow you to rebuild your credit and then lock into a low mortgage when your score is better. [Read our blog about concrete ways to improve your credit].
Even though there are no certainties in the world of real estate, there is little doubt that home ownership is still a goal and a smart investment for a high percentage of Americans. Now may be the perfect time to take advantage of favorable market conditions.
Home prices are expected to rise steadily, reaching pre-housing-crisis averages by the end of the year. In many markets, median rental prices are beginning to outpace median home prices. Use a quick Rent vs. Buy Calculator to assess the financial advantages of ownership, if you have any doubts.