The Buy vs. Rent Question in 2018

The question of whether to buy or rent is a timeless one for young American families, but the answer is rarely straightforward. Each year, personal finances shift, as do the political and economic winds. Location remains a central factor in such real estate decisions, but the fortunes of a particular local economy can also rise or fall.

Knowing whether your household, in your particular area, should buy a home this year or choose to rent takes some investigating. If you’re serious about getting started with your research, first you need to know what you can expect from the real estate market this year and where the best opportunities exist right now.

Where Buying Is Cheaper than Renting in 2018

For some households, the local economy might make your decision just a bit easier. A new Urban Institute study looked at the top 33 metropolitan areas in the U.S. and found 16 cities where buying a home is cheaper than renting.

The list leads off with several of the largest cities in the country. Miami claims the top spot, followed by Detroit, Chicago and Philadelphia. However, that’s not to say that housing here is cheap. Miami and Philadelphia tend to have higher costs of living, yet renting is still more costly than buying. For Detroit, revitalization is lifting home prices and rents, but a home purchase could still be a good bet – and one that’s within reach.

Other large metro areas on the list include New York and Boston, at twelfth and sixteenth on the list, respectively. Prices here are higher, but it’s still a better deal to buy than rent – that is, if you plan to stay put for three to five years.

Of the more affordable metros to buy in, Kansas City homes averaged just $126,000, while Pittsburgh homes averaged $145,000. Cleveland, Cincinnati and Columbus, Ohio, also made the list.

Why Buying Now May Be Your Best Bet

Of course not all readers will live in one of the Urban Institute’s picks for areas where buying is better. For the rest of us, other factors will need to be considered. Javier Vivas, an economic research director for Realtor.com, makes the case that 2018 may be the best chance left for those Americans on the fence over whether to take the plunge.

Vivas points out that a decade of previously unthinkably low interest rates will likely come to an end in 2018. While mortgage interest rates won’t be returning to the double-digit territory they occupied in the 1980s, rates in the three-percent territory seen over the last several years are likely behind us now. The Federal Reserve’s Open Market Committee is forecast to incrementally raise interest rates two to four more times this year, with the expectation that rates will hit five percent by the end of the year.

Also on the rise are home prices, though Vivas notes that prices are expected to climb more slowly this year, rising 3.2 percent in 2018, compared to a 5.5-percent increase in 2017. Existing-home prices will reportedly rise more modestly, at 2.5 percent year over year. Nonetheless, the fact remains that a home bought in 2019 will likely cost more than it would if purchased today.

More positively, inventory levels are expected to rise, which should help home buyers, particularly in the $350,000 to $750,000 price range. Boston, Detroit and Nashville, Tenn., are expected to be some of the first beneficiaries later this year of increased new construction activity. On the other hand, more millennials are moving into homeownership, which is good for the economy, but could continue to make things difficult for buyers in competitive markets.

Tax Reform Changes and Other Wildcards for Home Buyers

Such up or down industry shifts are typical most years in the U.S. housing market. Yet what’s more unusual is the kind of broad changes ushered in by the recent tax reform law. Consumer Reports doesn’t say the new regulations will make homeownership more costly or more affordable, but rather it will make the buy vs. rent decision more “complicated” for Americans.

Firstly, the report notes that the tax reform law could leave Americans with more take-home pay. According to the nonprofit Tax Policy Center, average after-tax income is expected to rise 2.2 percent in 2018.

Other economic wildcards that could work in favor of first-time buyers include expanding credit availability and lower eventual home prices. Government-sponsored enterprise (GSE) lenders Fannie Mae and Freddie Mac require GSE-backed mortgage loan applications to use the industry-standard credit scoring system developed by FICO. However, the Wall Street Journal says the pressure is mounting for the GSEs to accept an alternative credit-scoring system, which could open up homeownership financing to more than seven million new mortgage customers.

Due to a new cap on deductions, and the effect such limits could have on homeownership costs in high-cost areas, the tax law could lead to lower home prices in some of those areas, says Consumer Reports. Mark Zandi, chief economist at Moody’s Analytics, told the news outlet such price declines could happen in the next 18 to 24 months.

Conclusion

The decision of whether to keep renting or to take the plunge into homeownership will continue to occupy the minds of Americans in 2018. Tax reform changes could put more money in your pocket, but how much you can save will come down to your personal tax circumstances. Regional factors will play a huge role, and the price benefit of buying in certain areas will make the decision easier for some, but for others, not so much. As your household considers the personal pros and cons of homeownership, remember that the right answer is the right answer for your family. As always, do your research, crunch the numbers and talk with your financial advisor and a real estate professional about your needs.

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