Trulia: Buying Beats Renting Despite Rising Home Prices

By Robbie Whelan

To buy, or not to buy, and instead to rent? That, as ever, is the real-estate question.

Consumers often look to buy-vs.-rent comparisons and indices to make big decisions about housing. So as home prices rise and the recovery progresses, which side is up these days?

Trulia, the real-estate listings and data firm, has come out with a new analysis of this question. The answer? Buying is still resoundingly cheaper than renting, in basically every corner of the country, and you’d be better off buying, unless you: can’t qualify for a low mortgage rate; you don’t itemize your tax deductions; or if you plan to move within two to three years.

That said, buying has become slightly less attractive, when compared with renting, than it was a year ago. In early 2012, buying was 46% cheaper than renting. Today, it’s 44% cheaper. That’s because of rising prices. But falling mortgage rates (Freddie Mac reported Thursday that the average rate on a 30-year fixed-rate mortgage is 3.54%) have reduced the cost of buying, tempering the effect of rising home values. A year ago, for example, the average 30-year fixed-rate loan came with an interest rate of 4.08%.

“Home prices rose faster than rents, but with low mortgage rates, it’s better to buy than to rent everywhere,” says Jed Kolko, Trulia’s chief economist. “What’s surprising is that it’s still 44% cheaper to buy than to rent, despite the fact that home prices are rising.”

Of course, the results of Trulia’s study vary from place to place. In Detroit, where the housing market has been decimated by years of job losses and a painful crash of the subprime lending market, it’s 70% cheaper to buy than to rent. Most of the steepest buy-to-rent discounts are in Midwestern cities, including Dayton, Ohio (64%); Gary, Ind. (63%); Cleveland (64%); Warren/Troy/Farmington Hills, Mich. (63%); Toledo, Ohio (62%); Memphis, Tenn. (62%); and Kansas City (60%).

Buying is least attractive compared with renting in coastal markets, where supply is constrained, home prices are recovering quickly and home values are traditionally quite high. San Francisco leads the pack in “unaffordability” of for-sale property versus rental property—the discount to buying vs. renting is just 19%. It’s followed by Honolulu (23%), San Jose (24%) and New York City (26%).

San Francisco is a more nuanced case, however. A year ago, buying was 35% cheaper than renting. The reason for the dramatic drop, according to Mr. Kolko, is the surge in new construction. As the Journal reported, housing starts continued to rise in February. Although most of the monthly gains were in single-family housing construction, markets like San Francisco have mostly seen construction of multifamily rental buildings, rather than one-family homes.

For Buying or Selling, it helps to have a guide that gives you straight answers. For more information on buying, selling, or renting out an income property in San Diego, please call Frank Rashid's cell phone at (858) 676-5250 or email him at rashid@rashidrealty.com. More to follow within the next couple of weeks.