How renters could save vs. owning over 5 years
Renting in California, as costly as it is, is a far better deal today than being a homebuyer, saving an estimated $112,000 over the next five years for the typical tenant versus the new owners of a midpriced residence.
Numerous reasons exist to own a home, even in today’s tough market. But too many rentversus-buy calculations or homebuying affordability metrics don’t represent reality.
My trusty spreadsheet reviewed rents and homeownership costs in 50 big metro areas across the nation compiled by Zillow — including a half-dozen in California. The goal was to find the true cost of the roof above one’s head in a span of five years.
Top line
The typical Californian renter in the big six metro areas can expect to pay an average $3,190 a month to the landlord, assuming mid-2022 rents increase at a 4% annual rate.
Meanwhile, a California homebuyer can expect to spend on average $5,054 a month in the same five-year period. This expense includes making house payments on a 5.5% fixed-rate, no-moneydown mortgage; paying property taxes at a 1.5% annual rate; paying down 8% of the mortgage balance, and tax savings worth an assumed 20% of interest and taxes paid.
The result is a $1,863 savings per month for renters — or $112,000 extra paid by owners over five years.
If this math does not hit home hard enough, so to speak, consider that a hypothetical California buyer in mid-2022 needs 17% appreciation — after 6% closing costs — to sell five years from now and break even versus renting.
Locally speaking
The state’s six big metros have a wide range of results in this rent-versus-buy math. Let’s examine them by the size of a renter’s expected savings …
SAN JOSE >> $3,641 a month spent on rent over five years,
No. 1 among the 50 U.S. metros. A homeowner will pay
$8,317 monthly in net house expenses, also No. 1, for a house that cost $1.7 million. That’s $4,676-a-month renter savings or $280,500 over five years. So home prices must appreciate 23% over five years to break even.
SAN FRANCISCO >> $3,551 rent,
No. 2 nationally, versus $7,291 on a house, No. 2, for a $1.5 million residence. That’s $3,739 a month saved by renters or $224,400 over five years. So home prices must appreciate 22% over five years to break even.
LOS ANGELES-ORANGE COUNTY >> $3,229 rent, No. 5 nationally versus $4,546 on a house, No. 3, for a $948,000 residence. That’s $1,317
a month saved by renters or $79,000 over five years. So home prices must appreciate 15% over five years to break even.
SAN DIEGO >> $3,314 rent, No. 4 nationally versus $4,489 on a house,
No. 4, for a $936,472 residence. That’s $1,175 a month saved by renters or $70,500 over five years. So home prices must appreciate 14% over five years to break even.
Farther from the ocean, a renter’s edge thins with moves away from densely populated cities.
SACRAMENTO >> $2,520 rent, No. 9 nationally versus $2,945 on a house, No. 8, for a $623,735 residence. That’s $424 a month saved by renters or $25,500 over five years. So home prices must appreciate 10% over five years to break even.
INLAND EMPIRE >> $2,887 rent, No. 8 nationally versus $2,766 on a house, No. 13, for a $585,904 residence. Yes, renters will pay $121 a month more than buyers, or $7,300 over five years. But if pondering home prices after 6% closing costs, there must be 5% appreciation over five years for the market in Riverside and San Bernardino counties to end up a rent-versus-buy tie.
Nationally focused
The U.S. math isn’t as kind to renters.
Outside of California, renting is better in only 11 of the 50 metros — Austin, Texas; Boston; Denver; Las Vegas; Nashville, Tennessee; Phoenix; Portland, Oregon; Raleigh, North Carolina; Salt Lake City; Seattle; and Washington, D.C.
Nationwide, typical expected rent spending is $2,187 monthly versus a $1,651 net house payment for a midpriced $349,816 residence. That’s a $535 a month premium for tenants, adding up to $32,100 over five years.
So home prices — after closing costs — could decline 4% over five years and renters would just tie their homebuying neighbors, by this math.
Bottom line
My cost analysis isn’t perfect but it helps explain the challenging housing market in mid2022. Overpriced ownership opportunities help slow the purchasing pace as rents aggressively rise.
Yes, everybody’s cost of living differs, but you need apples-to-apples measurements to gauge what buyer or tenant might do. I used “nodown” loans for my math. It’s not conventional financing, but such deals represent a realistic comparative cost of buying yardstick to rent costs.
The alternative is to ignore the hefty down payments required to slash California house payments. Here’s what 20% down would cost around the state: San Jose ($341,000), San Francisco ($300,000), L.A.-Orange
County ($190,000), San Diego ($187,000), Sacramento ($125,000) and the Inland Empire ($117,000).
On the other side of the debate, a pair of ownership benefits frequently are ignored by purchasecost indexes.
The portion of the monthly check to the lender that reduces the loan balance seems rarely discussed. Shrinking the mortgage is forced savings by the owners, money they’ll get back when they sell. Over five years that equals roughly 8% of the original mortgage balance at today’s rates. Hey, many landlords won’t even return security deposits.
Plus, mortgage interest and property taxes can be deductible for income tax purposes. Note that no two taxpayers are alike and limits curtail use of these ownership deductions. But there is scant tax aid given to tenants. (Note: The standard deduction for all filers can trim ownership tax savings.)
Yet no matter the formula, mid-2022’s reality strongly favors the renter in California — and landlords know it. That helps explains recent aggressive rent hikes.
Rising rents are a major risk for renters; however, the uncertainty of future housing expenses isn’t part of the typical analysis of homebuying finances either.