Is Now a Good Time to Rent or Buy?
The dueling trends of rising home prices and rising rates have some first-time home buyers anxiously waiting on the sidelines, wondering if now is the right time to buy or if they should continue renting. According to the National Association of Realtors, mortgage payments increased to 25.6% of household incomes in the fourth quarter, up from 22.4% a year earlier. With affordability as an issue, renting may seem like a better option, at least in the short term. However, rental rates are also rising, causing quite the conundrum for first-time home buyers. Median rental prices in the United States rose for the 16th consecutive month, up to $1,876 in June, representing a 14.1 percent increase over the previous year.
With an increase in mortgage and rental rates, many first-time home buyers are pondering the question - Should I rent or buy?
We posed this question to two local experts for their take on the current real estate market - Larry Morrow, Vice President-Business Development at Sturgis Bank, and Nate Paulus, an experienced Southwest Michigan Realtor and Associate Broker-Owner of The Home Source Group.
Despite national trends suggesting it's cheaper to rent than purchase, a closer look by location reveals it is still more financially advantageous to purchase than rent in the Midwest. According to a recent report by Realtor.com, this region still favors first-time home purchases over rentals, with monthly home starting costs dropping by 0.9 percentage points, at $14 lower than rents.
Paulus affirms this and says, "Compared to many places in the country, Southwest Michigan is still a very affordable place to buy a home. The median national home price as of June was $416,000 (source: National Association of Realtors), while the median home price in Southwest Michigan in June was $242,000 (source: Southwest Michigan Association of Realtors). If you remove the lakeshore communities, the median sales price in June for our area was around $203,000."
Morrow agrees, adding that rental unit availability in Southwest Michigan is very limited, pushing rental rates to all-time highs. Morrow says, "Even with rising mortgage rates, it's still a better financial decision to purchase right now, as a mortgage payment is likely still lower than area rental rates."
Short Term vs. Long Term
When deciding between renting or purchasing, Paulus believes a long-term strategy is advantageous in this market, and he points to a comparison between the two options to illustrate the benefit of home ownership. According to Paulus, "If you do not own a home, you are most likely renting. Rental prices have risen sharply in recent years, and that increased cost is impossible to predict and difficult to budget in the long term. Although mortgage interest rates are rising, they remain historically low. Consider that many Americans pay upwards of $1,500 for rent. If you were to purchase a home for $225,000 with 20% down at a 6% interest rate, your monthly payment for your mortgage, taxes, and insurance would be similar to a $1,500 rental payment; however, you'd gain equity in your home and enjoy consistent rates over time."
Similarly, Morrow touts the benefits of building equity if the consumer is ready and able to purchase a home. According to Morrow, "I would recommend folks who are considering buying a home to speak with their local lender about financing opportunities, as there are loan options that allow as little as 3% down payment. Even in our current market, the short and long-term benefits will likely make owning a home a better financial decision than renting."
A Decision to Fit Your Budget
Whether to rent or buy often comes down to budget, and first-time home buyers should consider start-up expenses when determining the answer. Partnering with real estate and mortgage professionals to demystify the process and clarify associated closing costs will help buyers make an informed decision on a solid investment. According to Paulus, "When looking to purchase, it's important to do your due diligence. In doing so, you'll likely find that owning a home will be one of the best financial decisions you'll ever make."
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