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Monday, June 17, 2013

Buying Beats Renting in Memphis Until Rates Hit 21%

Home mortgage rates are beginning to rise, and that’s causing great anxiety among some would-be homebuyers who can’t find a home to buy.

According to a new analysis from the real-estate portal Trulia, interest rates could rise to 10.5%  nationally before renting would become a cheaper option than buying.

The numbers vary by city, of course. An interest rate of 5.2% tips the scales in favor of renting in San Jose, Calif., while buying would make sense in Detroit until interest rates rose to a whopping 35.8%.
Interest rates have begun to rise, from 3.4% to 3.9% in the past month. Rising rates, coupled with rising prices, mean that the cost of owning a home is getting more expensive. But interest rates have a long way to go before renting beats buying, at least from a statistical standpoint.

"Rates are now on the rise and are likely to keep rising, thanks to the strengthening economy and the Fed eventually trying less hard to keep rates low. But it will take big rate increases to turn off prospective homebuyers," Jed Kolko, Trulia’s chief economist, wrote at the Trulia Trends blog. "At today’s prices and rents, rates would have to rise to levels we haven’t seen in 20 years before renting is cheaper than buying a home on average across the country."

If you’ve been around for a while, interest rates below 5% still sound like an incredible bargain. The rate was about 12% when I bought my first house in 1983. A few years later, I bought a house from a couple who were paying 17% interest with negative amortization. When I was able to refinance that 12% interest rate to 8%, I thought I was getting a great bargain.
But just because rising rates won’t sink the housing market or make renting a statistically better deal, it doesn’t mean that the rates won’t change your personal calculations. If you’re buying a $200,000 house with 20% down, your payment on a $160,000 mortgage – not including taxes and insurance – is more than twice as much with an interest rate of 10.5% as it is with an interest rate of 3.4%.

For comparison purposes, here are monthly payments on a $160,000, 30-year, fixed-rate mortgage at various interest rates:
  • 3.4%: $709.57
  • 3.9%: $754.67
  • 5%: $858.91
  • 10.5%: $1,463.68
  • 12%. $1,645.78
So while the "tipping point" for buying versus renting in national statistics may be a 10.5% interest rate, your tipping point could be much lower.

Using Trulia’s analysis of the 10 largest metro areas, the cities with the lowest tipping point and the interest rate at which renting would make more sense are:
  • San Jose: 5.2%
  • San Francisco: 5.4%
  • Honolulu: 5.8%
  • New York: 6.8%
  • Orange County, Calif.: 6.8%
Those are followed by five other California metros: Los Angeles, San Diego, Ventura County, Sacramento and Oakland, with tipping points ranging from 7.5% to 8.2%.

The cities where interest rates would have to reach the highest points before renting is cheaper and the rates it would take are:
  • Detroit: 35.8%
  • Memphis, Tenn.: 21%
  • Gary, Ind.: 20.8%
  • Warren-Troy-Farmingt​on Hills, Mich.: 20.2%
  • Toledo, Ohio: 20.1%
They are followed by Cleveland; Dayton, Ohio; Grand Rapids, Mich.; Akron, Ohio; and Kansas City, Mo.-Kan., with rates ranging from 16.9% to 20%.

Source: MSN Blog

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