Price Difference Shrinking Between Home Ownership And Renting

Home ownership costs have plunged to near rent levels, a potentially promising sign for the housing market, but problematic for apartment investors. The percentage of average income required …

Home ownership costs have plunged to near rent levels, a potentially promising sign for the housing market, but problematic for apartment investors. The percentage of average income required to meet the typical mortgage is the lowest in three decades according to Credit Suisse, whose study showed the shrinking gap in the price of condo ownership versus apartment rent. See the following article from HousingWire for more on this.

With mortgage rates at record lows and housing markets stuffed to the gills with cheap distressed properties that’s led to declining home prices, the cost to own a home is sometimes cheaper than renting an apartment in many markets, according to analysts at Credit Suisse.

While a segment of the renting population continues to rent, many are looking to dip their toes in the homeownership waters. Credit Suisse said the percentage of median household income needed to pay the mortgage on a median priced home is at a 30-year low, as seen in the below chart.

Low mortgage rates and property values makes homeownership more attractive than renting for many. In many markets — including Washington DC, California’s Inland Empire, Las Vegas and Phoenix — paying for a mortgage is less expensive than renting.

In a report on the future growth of real estate investment trusts (REITs) that own and manage apartments, Credit Suisse cited this shifting trend as a concern for the apartment REIT sector’s future growth, among other remaining questions on the sector.

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To test the theory that owning is cheaper than renting, Credit Suisse compared the cost of owning a condo and renting an apartment located close to each other in two markets — downtown Stamford, Conn. on the East Coast and the Mission Bay neighborhood in San Francisco on the West Coast. The comparisons went beyond just the difference between making a monthly mortgage payment versus monthly rent. Credit Suisse compared tax implications, condo homeowners association fees, and provided comparisons based on both a 30-year fixed-rate mortgage (FRM) and a 5/1 adjustable rate mortgage, each with a 20% down payment.

The results were mixed. In Stamford, Credit Suisse compared an apartment complex and condo building 0.5 miles apart that are close in age and offer similar resident amenities. The cost to rent the apartment was $2.30 per square foot, while the cost to own the condo with a 30-year FRM was $2.68 (16% higher than renting) and the ARM was $2.56 (12% higher than renting).

In calculating the cost to own the condo, Credit Suisse said it did not factor in a number of variables, including if the borrower used a smaller down payment of 10%, or used a Federal Housing Administration (FHA)-backed loan, which requires as little as 3.5% down. In addition, the condo building in Stamford offers seller financing options with rates below prevailing market conditions. Another variable not taken into consideration was the cost to pay parking fees at the condo.

Despite the higher cost to own, the difference in 2010 was far closer than when the condo building in question opened in 2008. Then, the cost to own with a 30-year mortgage was $3.54 per square foot, 43% higher than the cost to rent at the same apartment building in 2008, $2.48 per square foot.

“Assumptions of renting versus owning vary considerably by individual,” Credit Suisse said. “However, one thing is clear- the spread has contracted considerably for any participant.”

In San Francisco, the condo and apartment buildings are located on the same street, just .3 miles apart. The cost to rent the apartment was $3.40, while the cost to own the condo was $3.34 square feet with a 30-year FRM (1.7% less than renting) and $3.18 with an ARM (6.5% less than renting). Previous years’ data was unavailable because both buildings are too new. But compared to prevailing mortgage rates in May 2010, which were, on average, 50 basis points (bps) higher, the after tax monthly cost of owning the condo was $100, about 3%, less in July 2010.

In the West Coast example, Credit Suisse said if the owner used a FHA-backed mortgage with a 3.5% down payment, instead of a conventional 30-year FRM with a 20% down payment, the cost to own would rise to $3.74, 10% higher than the cost to rent the apartment. In addition, another variable to consider is the equity the condo owner builds that the renter does not.

“If we excluded principal repayment from cost, the monthly payment for Stamford and Mission Bay would drop to $2.18 and $2.61 per foot from $2.68 and $3.34, respectively,” Credit Suisse said. “On this basis, in both markets, owning would screen cheaper than renting.”

Despite individual variables, Credit Suisse said its analysis illustrates that the relative cost of owning versus renting has contracted considerably in the recent credit crunch.

This article has been republished from HousingWire. You can also view this article at
HousingWire, a mortgage and real estate news site.

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