Looking Beyond the Rent vs Own Headline

The Wall Street Journal recently ran a story about a study report released by Deutsche Bank comparing the cost of renting and the cost of owning in 54 markets around the country. If you were to just glance at the graphic accompanying the story you’d see that the cost of renting in the Triad market is 121% of the cost of buying, which ranks it as the 12th highest in the country. If you dig a little deeper you find this in the story:

The estimated mortgage payments are based on median sale prices in the same period, according to the National Association of Realtors. The bank adjusts the estimates to reflect the tax deduction for mortgage interest. It also figures the typical homeowner pays 0.4% of the home’s cost on insurance each year, and 1.5% of the cost on property tax…

Deutsche Bank assumes buyers take out a 30-year mortgage with a 5% down payment. The bank also assumes buyers are in the 25% federal income-tax bracket.

In addition, Deutsche Bank uses the average interest rate on one of the most affordable mortgages, which comes with an interest rate that is fixed for one year and then adjusts annually, which tends to make buying look more favorable generally.

The standard 30-year, fixed-rate mortgage that most borrowers take out carries an interest rate that is more than one percentage point higher on average.

Changing the assumptions can make renting or buying look more favorable. For example, a buyer who is in a higher tax bracket or who makes a larger down payment would be in a stronger position. But if a buyer had to pay a higher interest rate on a mortgage, renters would be relatively better off.

Now, if those assumptions are consistent across all markets then you could say that the Triad would still come out looking like a more expensive renters market than all but eleven other markets in the US. That may or may not be true, but there are factors besides cost that go into the rent vs buy equation that might make buying in the Triad less attractive. Among the biggest is the need for consumers to remain flexible, to not be anchored by a mortgage, because unlike larger metro markets if you lose your job here then you are more likely to have to relocate to find a comparable job.

Then there’s the not-so-small issue of qualifying for a mortgage, and if you’re not into buying an existing home, good luck finding a new home since approximately twelve houses have been built the last five years (insert sarcasm here). So before we all start predicting a mass exodus from apartments we need to read past the headline. Until the Triad can fix it’s job problem, at a minimum, we’re not likely to see it.