So you think that the current housing market isn't ideal? No doubt it is easy to make that argument when comparing to years when rates were 3% or lower.
But a true apples to apples look at purchasing your home vs renting may change your mind, these are up to date numbers in a real life scenario.
Setting the context is important, the subject here will be a single family residence with three bedrooms and two bathrooms. We have no evidence telling us that rental prices of these homes would be lower if interest rates were lower. The most important factor for rental prices in any market is supply & demand. Since my current market is Ventura County, California, I will use those numbers. As of the writing of this blog post Zillow shows that there are a total of 18 units available in Ventura county that meet the 3+2 criteria, in a County home to roughly 850,000 residents. The current average rent for a 3+2 is $3,795/mo.
This prospective buyer is well qualified to purchase right at the County median of $750,000 for 3+2 SFR. But, the general feel of the market has him nervous about purchasing what he wants…but should he be?
Everyone knows there are tax advantages to owning a home, but few know what those numbers look like and the difference they actually make; so here are the numbers. At $750,000 purchase and $700,000 loan amount after $50,000 down payment.
Property taxes and mortgage interest paid in that particular year is what can be written off taxes. This buyer would have an annual property tax burden of $9375. The interest paid in his first year of owning the home would be around $41,604. Multiplying those two numbers by the borrower’s tax bracket gives the tax savings he will realize after his first year of home ownership. This borrower’s tax bracket is 25% giving him a tax write-off of $12,744.75 in his first year of home ownership.
Initially when I told the borrower that with current interest rates the $700,000 loan would cost him about $5300/mo he balked and replied that he only wanted to spend about $4000/mo, basically the amount he spends on rent.
Yet, looking at purchase vs rent as apples to apples means if we divide the tax savings of $12,744.75 by 12 months his realized monthly savings would be $1062.06. This effectively reduces his monthly mortgage obligation to $4237.94. Only $442.94/mo (less than $15/day) more than the median rent.
With an average growth of 5% equity in California the home he would own 12 months from now could be worth $37,500 more offsetting his higher monthly payments by more than 6x's in only one year.