Renting vs. Buying a Home
"The share of first-time home buyers dropped earlier this year to its lowest level since 1987. First-time home buyers now account for 36% of home purchases, down from 40% in the three previous years.
High home prices have helped drive many first-time buyers out of the housing market. Now, with prices falling in many areas, there are some signs that buyers are beginning to drift back."
As the table above shows, the cost of renting an apartment, relative to buying a home, has decreased in all cities (except Indiapolis) over the last 5 years, due mostly to the 42% rise in home prices over this period. The table also show that in 2001, it was about 2% more expensive to rent than buy on average, but now it is about 21% less expensive to rent than buy. However, as home prices and interest rates fall, the advantage is shifting back towards buying, and the first-time home buyers are shifting from renting to buying, as the article points out.
For example, a year ago, the monthly payment for a home at the median price of $229,000, at the average 30-year mortgage rate of 6.33%, with a 20% down payment, was $1138. Today, the monthly payment for a median price home of $221,000, at the current rate of 6.16%, would be $1,078, or 5.3% lower than a year ago.
Bottom Line: There probably won't ever be a significant crash in home prices, because of a powerful self-correcting mechanism in place: Once home prices start to fall enough, the advantage shifts towards owning a home vs. renting, first-time homebuyers are attracted by the falling prices, and the demand for buying houses increases. Right now, it's as if houses are "on sale" at a 5% discount compared to a year ago because of falling home prices and falling interest rates. If Macy's can have a sale, why not the real estate market? It's a great time to buy a house.