The Great Rent versus Buy Debate: Renters Lose Edge on Homeowners

The relative cost of owning versus renting is swinging back in favor of home ownership in some U.S. markets, as a result of the sharp declines in home prices, reports WSJ.

WSJ continues:

After two years of rapid home-price depreciation, the relationship between the cost of rental payments versus after-tax mortgage payments is tilting toward ownership in a number of metropolitan areas.

Over the past 18 years, after-tax mortgage payments have averaged 26% more than rent payments, according to Green Street Advisors, a real-estate consultancy based in Newport Beach, Calif. In 2006, at the height of the housing bubble, mortgage payments reached as high as 66% more than rent payments. But by the end of 2008, average monthly rent for the largest 50 metropolitan areas was $1,045, compared with after-tax mortgage payments of $1,300, assuming a rate of 5.5% on a 30-year fixed mortgage. That means mortgage payments averaged just 24% more than rent payments, the narrowest gap since 2001.

In more than half of the top 50 U.S. housing markets -- including Los Angeles, northern Virginia and Las Vegas -- the ratio is now below its 18-year average. In Los Angeles, for example, mortgage payments averaged 60% more than rent payments between 1990 and 2008. Now, those payments average 30% more than rent...

A separate report by Moody's Economy.com also finds that home prices relative to rents are more in line with their historical relationship...The report notes that home prices relative to rents remain well above historical levels in 30 markets, including Philadelphia; Portland, Ore.; and Virginia Beach, Va.

As far as the great buy versus rent debate is concerned, I personally do not see a big enough edge to the buy side. I want to stay flexible and have the ability to move if economic times become extremely severe and it becomes downright dangerous to live in parts of the country. Further, and I am not predicting this will absolutely occur, but I don't rule out severe energy shortages down the road if inflation gets bad enough and price controls are implemented. If energy shortages are severe enough where heating oil, and the like are impacted, I don't want to be stuck in a cold weather state.

That said, for those who have a strong nesting instinct, this is probably the best buying opportunity you are likely to see in the next five to ten years, maybe in your lifetime. However, with any mortgage you take out make sure it is fixed rate. Interest rates are likely headed much, much higher, and obviously you don't want your mortgage payments climbing with the spike in overall rates.

Not as important in the current environment, but certainly a plus if you can get it, is a mortgage with a small or no pre-payment penalty, thus giving you a bit more flexibility.