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Thursday, September 27, 2012

Rent vs. Buy - we live in interesting times...

Recent research by Zillow has shown rather dramatically that now is a time to buy vs. paying to rent. Zillow created a new measure that they’ve called the “breakeven horizon”, which purports to show how long you would have to live in a place while renting before you would break even and start saving money by having bought. Generally, with favorable mortgage rates and other advantages of home ownership you will always reach a breakeven point and cross over into saving money; however, in the past a price to rent ratio method was used to calculate how long it would take to break even and the standard was 15 years.

With many people moving (or planning to move) more often than that time horizon, it used to make sense to rent. Now many areas of the country have seen purchase prices drop so dramatically and mortgage rates remain so low, that the time horizon for that cross over into saving by buying is much shorter. The Zillow people also created a new comparison method called the breakeven horizon, whioch takes more factors into consideration.  Click here to read the Zillow article that explains this and shows some of the major cities in the U.S.  Interestingly the Detroit area is rated at 1.7 years to break even. The Detroit number is so low because of the dramatic fall in home prices in that market.

If you read through the material at Zillow the point really is that the combination of low prices and great mortgage rates makes this a very good time to buy vs. renting. Even if the breakeven horizon is 3-5 years, it still makes sense. It also makes sense because we are at or near the bottom of the market, so far as value drop is concerned. In our area we’ve actually already started back (re-gaining some of the value lost to the recession), so you’ve missed the bottom. So, the fact that values are on the rise again makes the argument to buy even more compelling.

So, if you’ve been renting or considering renting, it might be time to look at buying instead, assuming that you plan to stay in one place for 3-5 years. Of course, if you just trashed your credit with a short sale, foreclosure or bankruptcy, you’ll still need to me to recover from that and renting may be your only option. If you’ve been rebuilding your credit for 3 years or more it may be time to look at whether you can buy again. Give me a call. I’ll put you in touch with some mortgage people who can evaluate your current qualification to take advantage of the current rent vs. buy breakeven horizon.

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