Buying Homes Preferred Over Renting

May 16, 2011 / Russell Legato, Residential Property Analyst

For the first time in years, buying a home has beat renting one.

Buying Homes Preferred Over Renting

According to Ken Johnson of Florida International University and Eli Beracha of East Carolina University’s research paper that is going to be published in Real Estate Economics, there are two factors that support the findings.

First is that because rents are expected to increase higher as more people are bit by the housing turn to renting. According to president Peggy Alford, rents could rise by 7 percent in each of the next two years.

Second is that because home prices have finally dropped enough to create a buying opportunity. Nationally, prices are have dropped 32 percent from their peak in 2006.

The net result of these two factors is home price gains that average only 3.25 percent annually to beat renting, according to Beracha and Johnson. It is required that in this example, a person has to stay in the home for at least eight years.

Beracha and Johnson also compared the cost of owning with the cost of renting. They found out that renting came out ahead because buying usually leads to higher monthly and annual bills when all costs like mortgage payments, property taxes, maintenance and transactional costs are factored in.

However, the said costs will be offset if the home gains value. That’s why in the end, buying still beat renting.

Another reason that supported homeownership is the premium on home values.

It is important to note though that how much better buying will be depends on location. Of the 23 cities Beracha and Johnson looked at, Seattle is the best place to buy right now. But for several cities such as New York, Boston and Dallas, renting is still preferable. In New York, for example, homeowners would need a 7 percent annual rise in home values to beat renters.




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