Are you currently renting the home that you live in? The Distressed Real Estate Institute™ recently analyzed data on historical pricing for existing home sales of single family homes in the U.S. We looked at historical price data for single family homes from the U.S Department of Housing and Urban Development (HUD) going back to 1970. We applied historical real estate data to today’s real estate market in order to compare and analyze how a typical first time home buyer today could benefit by purchasing a home similar to the one that they are currently renting. Based on historical data, along with current home prices and mortgage rates we believe that if you are currently renting and you have decent credit then you should really think about buying a home right now. This is especially true if you are a first time home buyer who could qualify for an FHA Loan.
Prices have declined so much over the past few years that in many cases your monthly payment could actually be cheaper to purchase a house than to rent it. This is true even after we account for property taxes, insurance and maintenance and repairs. And aside from the monthly housing cost, the historical housing data suggests that continuing to rent instead of buying a home will cost you dearly in the long term.
We compared the costs of purchasing a typical 3 bedroom 2 bathroom entry level home to the costs of renting that same home. While we used a home in Florida as an example the same holds true in all 50 states since the HUD housing data that we are using provides existing home sales data averages for the entire U.S. The price of the home that we used as an example would appraise for approximately $130,000 and would rent for about $1,200 per month.
Current FHA regulations require a 3 ½ percent down payment which would be $4,550 for a $130,000 home. The monthly interest and principal payment with a 30 year fixed mortgage at 3.5% interest would be approximately $700. Property taxes on that home including the homestead exemption would amount to about $133 per month and insurance for that home would be about $150 per month. Adding up the mortgage payment, property taxes and insurance a first time home buyer would have a total monthly payment of $983 per month which is cheaper than paying $1,200 to rent the same home. And this is before considering the tax advantages and deductions of being a home owner compared to being a renter. Other advantages include having insurance for your possessions, having a fixed payment that never changes (if you have a fixed rate mortgage) and knowing that you will not be forced to move or have your rent raised every time your lease expires. The main disadvantage of owning a home would be repairs and maintenance but with the above example you are being adequately compensated to own the home versus renting it (by $217 per month).
Our company specializes in understanding the entry level low priced single family starter homes which are most attractive to first time home buyers. These are also the type of homes that our investors who are cash buyers are most interested in.
These homes are perfect for landlords who want to buy fix and rent and they are also ideal for investors who want to buy fix and flip to first time home buyers. We know this market well because we teach our students how to buy bank owned homes directly from the bank and we show them how to fix and then sell these houses to first time home buyers for a profit. Based on our experience with these first time home buyers many people that are currently renting simply do not know that it could be possible for them to own their own home. If you are currently renting and your credit is not great there are still circumstances where you might be able to buy a home. We have offered seller financing to buyers who had less than perfect credit and we have shown our students how they can offer seller financing to first time home buyers with poor credit. In many cases the buyer’s monthly payment can still be substantially less than rent for the same home.
When you look, at historical pricing data for single family homes in the U.S. the case for owning a home versus renting a home becomes much more convincing. We found that using historical data, this same $130,000 house could be worth as much as $902,200 30 years later in 2043. This is the year when the 30 year mortgage would be paid off meaning that there would be no more mortgage payments (assuming that the house was purchased in 2013).
These results are based on extrapolating National Association Of Realtors® existing home sales data going back to 1970 which is the first year that they started tracking this data. According to the existing home sales data which can be found on HUD’s web site the average price of a single family home in the U.S. in 1970 was $25,700. 30 years later by the year 2000 the average price of a single family home was $178,500. This works out to be a multiple of almost 7 times more than the average price 30 years later. To see this data click on this link: https://lexlevinrad.com/existinghomeprices.html
Now we don’t know if housing prices will grow at the same pace over the next 30 years but we do know that based on the combination of strong population growth and an increase in inflation that real estate prices will certainly increase substantially over the long term.
In the above example, 30 years later, a home owner with a home that is paid off has an almost free place to live in their retirement years (you still have to pay property taxes, insurance and repairs). Compare that to the cost of paying rent for the rest of your life. If rent increased by just 3.5% per year then after 30 years that same house that was renting for $1,200 would be renting for $3,368. To see a chart showing 30 years of rent increases click on this link: https://lexlevinrad.com/rentincreases.html.
When you look at these numbers you see that being a long term renter compared to being a home owner will have dire consequences down the road especially over the long term. Unfortunately in real estate most people look only at the short term (for example what happened between 2007 and 2013). People under the age of 30 have the most to gain by becoming home owners although with prices so low right now is a great time for anyone to be buying real estate. If you have good credit then you should definitely make the decision to buy instead of renting. If you keep renting, then your cost of living will continue to go up each year just like in the example above.
As you can see based on the past historical housing data owning real estate will always pay off in the long term if you hold the real estate long enough. Short term booms and crashes like we saw over the past few years (see the HUD data in the chart from 2003 to 2012) are exactly that – short term. If you look at long term data that is 30 years or more then you see that over time real estate prices in the U.S. increase substantially. As long as you believe in the future of the U.S. and the fact that the population will continue to grow and people will continue to immigrate to the U.S. then investing in real estate by buying your own home and keeping it for the long term is a great investment.
If you are currently renting your home and you have good credit, then in many cases depending on where you live this could be the best opportunity in your lifetime to buy a house at an affordable price. As we showed you in the example above, in many cases the monthly payment could be the same amount or even less than what you are currently paying in rent. This might not apply if you live in San Francisco, New York or other expensive housing markets. But it will apply to most cities and states in the U.S. The market crash and foreclosure crisis of the past few years has created a unique situation where for the first time in many years purchasing a home is actually affordable. Remember, this is the best time in your life time to be buying real estate.