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The gap between renting and buying is narrowing across cities in the United States but home ownership is still 38% cheaper than renting and will be until interest rates reach 10.6%, new research shows.

With interest rates at a fixed rate of 4.5% buying is 38% cheaper than renting nationally, compared with 44% a year ago, according to the latest report from real estate online firm Trulia.

It points out that the rent versus buy calculation is different in each local market so there are variations on the national figure. For example, buying ranges from being just 5% cheaper than renting in Honolulu to being 66% cheaper than renting in Detroit.
 
But even for a specific market, the cost of buying versus renting depends on how much home prices rise or fall after you buy.

Overall the report shows that even though prices increased sharply in many markets over the past year, low mortgage rates have kept home ownership from becoming more expensive than renting. Also, in some markets, like San Francisco and Seattle, rents have risen sharply. Rising rents hurt affordability relative to incomes, but rising rents make buying look cheaper in comparison.

The firm says that some markets might tip in favor of renting this year as prices continue to rise faster than rents and if, as most economists expect, mortgage rates rise.

In its research report Trulia has identified a mortgage tipping point at which renting becomes cheaper than buying, given current prices and rents. If rates rise, Honolulu would become the first metro to tip, at a mortgage rate of 5%. San Jose and San Francisco would also tip before rates reach 6%.

But those are the extreme markets. Nationally, rates would have to rise to 10.6% for renting to be cheaper than buying and rates haven’t been that high since 1989.

‘Buying remains cheaper than renting across the country even after 2013’s big price rebound. Mortgage rates are still near historic lows, despite rising a point in the past year, and would be the envy of time travelers from the 1980s, 1990s, or 2000s,’ said Jed Kolko, Trulia’s chief economist.

‘Even in markets like San Francisco where home prices are high relative to pay checks, buying costs less than renting for people who stay seven years and itemize their deductions,’ he added.

Kolko pointed out that in many markets, the rent versus buy decision depends on the one factor you can’t control or perfectly predict and that is what happens to home prices after you buy.

‘Sharp price appreciation could make home ownership essentially free, but price declines could mean that renting would have been the better deal in hindsight. The current home price recovery could lull prospective buyers into thinking that future price gains are inevitable, but when doing the rent versus buy maths, people should prepare for the worst, not just hope for the best,’ he added.

Indeed, he explained that during the housing bubble buyers thought home prices would continue to rise forever but they didn’t. With asking prices up 11.4% year on year nationally in January 2014, today’s buyers could fall into that same trap.

To look at the worst case scenario, Trulia calculated the cost of renting versus buying a home with the assumption that prices will appreciate or depreciate as they did during each local housing market’s worst seven year period over the last 20 years.
 
With this assumption, if the worst does happen, renting would become cheaper than buying in 37 of the 100 largest US metros. For example, buying would become 79% more expensive than renting in San Jose if prices fell 2.8%. Kolko said this is because even small differences in price appreciation can have a big effect on the future sales price of the home.

This article was republished with permission from Property Wire.