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Buy or Rent? Buying a Home is More Affordable in Most Metros

Family-in-backyardShould you rent a home or buy a home? The answer depends on your unique circumstances and financial situation. But a new study suggests that purchasing is less expensive than renting in most housing markets. That lends strong ammunition to the argument that owning is the better strategy if you desire home affordability.

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Where is Buying a Home Cheaper Than Renting?

A new report by ATTOM Data Solutions had some interesting findings:

  • Owning a three-bedroom, median-priced home is more affordable than renting a three-bedroom residence in 53% of counties examined. That equates to 455 out of 855 American counties
  • Average rents outpaced median home prices in 32.7% of markets (280 counties). These metros include Los Angeles County; Cook County (Chicago); Maricopa County (Phoenix); San Diego County; and Orange County (outside Los Angeles)
  • Homeownership saves money for average wage earners in 90% of counties where the typical three-bedroom home sells for less than $175,000
  • The most affordable rental markets include Roane County (west of Knoxville, Tennessee, where only 20.1% of average wages is needed to rent); Steuben County (south of Rochester, New York; 22.2%); Madison County (Huntsville, Alabama; 22.4%); Greene County (outside Dayton, Ohio; 23.0%); and Sangamon County (Springfield, Illinois; 23.2%)

Home Affordability Is Increasing

Todd Teta, chief product and technology officer for ATTOM Data Solutions, says there are many interesting takeaways from this report.

"From a bird's eye view, buying looks like a better housing deal in a majority of the United States. That's because the cost of ownership in those markets consumes less of the average worker's wages than renting," he says.

This broad picture is far different than last year.

"That's when a similar analysis found that ownership was more affordable in only 41% of the nation," Teta says.

The most surprising finding? Homeownership could become more affordable, even though home prices keep rising across the country.

"This is due to declining mortgage rates, which may be the single biggest thing propping up the housing boom," adds Teta. "But any interest rate rise could knock the affordability picture back in the direction of renting. And all of this speculation is under a major cloud right now because of the potentially severe effect of the coronavirus."

Related: What to Do if Your Mortgage Lender Declines Your Application

Why Is it Better to Buy a Home Now?

COVID-19 consequences aside, it's easy to see why purchasing is a better deal than renting in most markets analyzed.

"This is mainly due to falling interest rates combined with relatively low housing prices in some parts of the country, layered on top of rising wages," Teta adds. "In recent months, the average worker has had a little more money to spend, following a roughly 3% increase in average wages across the nation last year."

Suzanne Hollander is a real estate attorney and Florida International University senior instructor. Ask her and she'll tell that purchasing makes better sense for many reasons.

"In many major cities, there's a low inventory of rentals. This causes rents to rise and become unaffordable," she says. "Plus, interest rates are so low lately that your monthly mortgage payment is often lower than your monthly rent payment. And buying allows you to build equity and make your dollars work for you. You can't build equity when you rent."

Homeownership Protects You From Rent Increases

Phil Georgiades with FedHome Loan Centers seconds those sentiments.

"Buying a home is also a hedge against inflation and prices continuing to rise. Once you've bought your home, you're locked into that price. The real value of the dollar tends to drop over time. Hence, paying a fixed amount for your home helps protect you against inflation," says Georgiades.

Put another way, your monthly principal and interest payment on a home doesn't increase with inflation. But your monthly lease may rise when you least expect it.

"Renters typically don't have any control over if and when the monthly rent increases. That can leave you priced out of the neighborhood," explains Beatrice de Jong, consumer trends expert at Opendoor. "Worse, the landlord may decide to sell the building at any time, leaving you scrambling to find a new place to live."

Also, home values generally remain consistent and may even rise. The opposite is true when, for example, you buy a car - which steadily depreciates.

"And owning property allows you the freedom to customize your home to your liking. You can renovate the kitchen or bathroom, decorate to your desire, and host parties," de Jong says. "You don't have that flexibility as a renter."

Related: Mortgage Preapproval (Avoid These 9 Mistakes)

When Should You NOT Buy a Home?

Of course, renting has its perks, too. You aren't tied to a particular address. If your job relocates or you want to move on, it's a lot easier to pick up and do so with ease.

It can also be easier to financially qualify as a tenant than as a mortgage borrower.

And if you can't make your rental payments, the worst-case scenario is eviction. You don't risk losing your home.

Lastly, as mentioned, renting is actually more affordable in many markets.

"For instance, that's true in the Northeast and West," says Teta. "There, renting eats up 43% of average waves versus 54% for owners of a median-priced home of at least $225,000."

Related: How to Get a Mortgage if You're Self-Employed

Is Buying a Home Right for You?

Are you ready for the responsibility of owning - which includes paying off your mortgage debt and maintaining and repairing the property? If so, you could be an ideal buyer candidate.

"More importantly, you have to be able to afford the down payment and monthly mortgage payments. That means having money saved and counting on a reliable job that pays well," says Georgiades. "Another consideration is credit. You don't need perfect credit to qualify for a mortgage. But if you have no credit history or are recovering from bankruptcy, spend a year renting and re-establishing your credit."

If you can get preapproved by a lender, you're in good shape.

"Interest rates remain low," Hollander says. "If you have a job you can count on and can substantiate two years of wages, act now before your window of opportunity closes."

But banks are also looking to see that you have a job "and can verify your income on the date you apply for the loan and the date that you close," says Hollander. "Banks don't condition your loan approval on the fact that there may be layoffs in your industry."

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