Are you wracked with analysis paralysis on whether to buy a house or rent an apartment?
You are not alone these days. Rising mortgage rates have completely changed the equation for potential first-time buyers.
Consider these puzzling market dynamics: Mortgage rates are nearly double what they were a year ago, but they’re still below historical averages. Home prices are still on the rise, but these increases are rapidly slowing. Buyers have more choice than last year, but homes are still selling out in just about a month.
What should a potential buyer do?
From a purely financial standpoint, it is significantly cheaper to rent in the metro area as rental prices in the Twin Cities are much lower than in similar sized markets and are significantly cheaper than a house payment typical.
Jeff Tucker, chief economist at Zillow, said that in August the typical monthly rent for houses and apartments in the Twin Cities metro was $1,683 – the 20th lowest among the 50 largest metros – against a payment $2,181 mortgage for a typical Twin Cities home. This includes principal, interest and private mortgage insurance (PMI), assuming a 5% down payment.
That $498 spread is larger than any of the 19 markets with lower rents.
“That doesn’t necessarily mean leasing is the best long-term financial choice,” Tucker said. “But it does mean recent market moves have tipped the math more in favor of leasing, and leasing makes more sense financially in the Twin Cities than in other peer markets.”
Tucker said with higher mortgage rates eroding purchasing power, the market is rebalancing, meaning price growth is slowing to a more sustainable level. That means buyers shouldn’t expect the searing price gains seen earlier in the pandemic.
“At the same time,” he said, “buyers waiting on the sidelines for significant purchase cost savings could also be disappointed, if interest rates rise further or rising rents erode their current savings.
The economists of real estate agent.com recently completed a similar analysis, which showed that among the nation’s 50 largest metros, rents in the Twin Cities grew at the slowest rate in June, rising 3.3% year-over-year to reach a median of $1,597. The average across the 50 largest US metropolitan areas? $1,876.
This study was conducted when the average 30-year fixed rate mortgage was 5.52%; Today it is almost a percentage point higher.
Meanwhile, the going price for the median starting home in the Twin Cities this summer was $279,408, 13.8% higher than a year earlier. The monthly cost of this first home was $2,249, 34.2% more than the previous year, making the monthly cost of buying a first home $652 more expensive (40.9% ) than that of rental.
Higher mortgage rates, stable rents and rising house prices have meant that the monthly cost of renting a home is lower than buying a first home in 38 of the largest 50 American cities. That’s a big increase from January, when the same analysis showed renting made more sense than buying in just 24 markets.
Experts say that while the economics of buying are important, other factors should be considered:
- How long do you plan to live in this house? Selling a house is expensive, so in a time when house prices are rising more slowly, you might not have enough equity to cover your costs if you only plan to live in the house for a few years.
- Are rents in your area likely to increase?
- There are also lifestyle differences. Do you want a maintenance-free life or do you love yard work or do you need a large piece of land for some reason?
Jeff Wills, a property adviser who regularly helps people decide if it’s time to buy, said affordability is at the forefront of every conversation he has with people weighing their options.
“It’s difficult to paint with a wide brush because many consumers’ individual circumstances are different,” he said.
Wills, program manager for Minneapolis-based nonprofit PRG, said potential buyers who meet with PRG advisors are encouraged to start the process by setting a budget. The nonprofit also connects potential buyers with resources that can help provide assistance with the down payment and closing costs.
Wills offers the following considerations for people weighing their options:
- Get advice on whether or not it makes sense to buy from someone who won’t benefit financially from the outcome of this decision. He suggests discussing the situation with a HUD-certified housing counselor rather than a loan officer or realtor.
- Ultimately, the decision largely depends on the personal circumstances of the buyer. Not everyone is financially in a position to buy a home, but buying a property you can afford with a fixed rate mortgage will give buyers longer-term control over their housing costs. .
Wills said that despite higher interest rates, home ownership is still the primary way the vast majority of Americans create wealth, so he encourages people to buy if they can.
“Given our dismal BIPOC disparity in property, it’s no wonder families of color in the Twin Cities have only a fraction of the wealth enjoyed by white families,” he said. written in an email. “The best time (in my opinion) to buy a house is when you can afford it.”
LASSI DECISION SUPPORT
Rent or purchase calculators can be a big help when it comes to understanding the financial implications. one of us favorite calculators was created by The New York Times. There are many more, including a useful “Should I buy a house or continue to rent” Fidelity Investments spreadsheet. This site includes a list of five questions you should ask before buying, as well as a link to a rent or purchase calculator.
If you would like to speak to someone about your situation, there are many options in the Twin Cities, including PRG Inc, a local non-profit organization that provides HUD-approved counselors and homebuyer courses. You can reach them at 612-721-7556. The Minnesota Home Ownership Center is a one-stop-shop for information, resources, courses, and advice statewide. His phone number is 651-659-9336.