In Some Metros, Soaring Home Values Make Renting More Enticing

Mike Sorohan msorohan@mba.org

July 30, 2018

Nearly two-thirds of American adults own homes. But in some metro areas, renters may have an incentive to stay renters.

Trulia, San Francisco, reported for the first time in the past five years, when evaluating the economics of renting versus buying, renting has come out best in two West Coast metros: San Jose, Calif. and San Francisco--places where home values have soared and surpassed the $1 million mark, while rents have flattened or sunk. And, in a few other markets, including Honolulu and Seattle, the savings from buying have melted away, leaving buying with only a slim advantage.

Trulia Senior Economist Cheryl Young said nationwide in July, the financial benefit of buying over renting reached its lowest level since Trulia began tracking renting versus buying five years ago, dipping to 26.3% from 35.7% a year ago. Over this same period, rents registered their first annual decline--down 1.1%--while home prices continued their rise, up 8.1%. The divergence of home values and rents drove the 9.4 percentage point drop in savings from buying, the largest annual change in five years.

"To be sure, in most places, buying is still a significantly better financial proposition," Young said in a Trulia commentary (https://www.trulia.com/research/rent-vs-buy-summer18/). "But, looking nationwide, the steady upward march of home prices has shrunk the savings from buying in every one of the country's 100 largest markets."

Young said this dip in savings from buying is driven in part by cooling rents, which have dropped or remained flat in 82 of the 100 largest markets, with 51 of them seeing rental prices fall over the past year. In the nation's two priciest metros, San Jose and San Francisco, the savings from renting amount to 12.2% and 5.8% respectively. In San Jose, home prices have rocketed a whopping 29.0% since last year, while rents have remained unchanged.

Zillow, Seattle, reported this week rents rose at a 1.3 percent pace over the past year to a median of $1,440. Rent appreciation has slowed nationwide for four straight months and has now been below the overall rate of inflation for two consecutive months.

Trulia noted as mortgage rates edge higher, they have a significant impact on the rent-versus-buy decision. From 2015 to 2016, when changes in home prices and rents were more aligned, mortgage rates were the key factor driving the rent-versus-buy decision. Rates decreased 0.67 percentage points from the first week of July in 2015 to that same time period in 2016, which helped give buying a 41.3% advantage over renting. These days, Trulia said, diverging home values and rents combined with higher mortgage rates are eating away at the savings from buying.

"All the same, on a national level, these trends have not eliminated the considerable advantage buying has over renting," Young said.

Trulia said for residents of San Jose and San Francisco, escalating prices are driving homes further out of reach, but there's a silver lining for home seekers in these Bay Area markets: rents were unchanged in San Jose and fell 3.0% in San Francisco.

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