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Bernice Ross
Numerous articles have been written proclaiming that it’s cheaper to rent than to buy, that today’s high prices are preventing first-time buyers from purchasing, and that Millennials aren’t nearly as motivated to purchase homes as the Baby Boomers were. The next time you hear one of these “myths,” here’s how to set the record straight.
Millennial Attitudes
Two recent surveys from the National Association of Realtors and Zillow found that Millennials and Boomers want to become homeowners in equal numbers.
NAR’s “Profile of Home Buyers and Sellers” for 2016 was based upon a 132-question survey that generated 5,465 responses from buyers.
Zillow conducted a 160-question survey of 13,000 homebuyers who had closed transactions in 2016. The average buyer in the study was 36 years old, with half the buyers being Millennials. Zillow’s study is especially compelling because the dataset is over twice as big as NAR’s.
In both studies, the primary reason why respondents wanted to purchase a home was the desire to own a home of their own.
NAR’s data and Zillow’s data differ on one very important point. NAR reports that first-time buyers accounted for only 32 percent of the market in 2015 and 35 percent in 2016.
In stark contrast to NAR’s findings, Zillow COO Amy Bohuntinsky reported that their data showed that 53 percent of all sales in 2016 were to first-time buyers. Given the size and the depth of the Zillow study, one could certainly argue that the NAR numbers may be seriously underestimating the percentage of first time buyers.
Affordability And Rent Vs. Buy
Zillow’s findings showed that today’s borrowers are spending an average of 15 percent of their income on their mortgage versus the 30 percent they spent in the 1980s. Even though prices are higher, today’s first-time buyers are spending a smaller portion of their paycheck on their house payments.
Another line you’ll often hear is that it costs more to own rather than rent, as a recent CNBC article proclaimed was the case in every U.S. state. While the median rents may be less than the median house payments, that comparison is a poor one, and here’s why:
- The median payments for homeowners will always be substantially higher than they are for renters, primarily due to the large number of homes that are priced at $500,000 or more. Homes at this price point and above only constitute a tiny proportion of the overall rental market.
- Every month that homeowners make a payment, they build equity. Even if there is zero appreciation or inflation, at the halfway point on a 30-year mortgage, the typical homeowner will have approximately a 35 percent equity position in their home.
- Focusing on the monthly cost of renting versus owning fails to acknowledge the money saved by the homeowner over time. Rents increase over time; fixed mortgages do not. For example, a rental payment in July 2002 of $1,500 would have increased to $2,039 by July 2017 due to inflation.
Interest Rates Matter
Another claim: prices are leveling off and waiting to purchase won’t make any difference. First, there’s no evidence that’s true in Massachusetts, and second, interest rates make a huge difference in the life of a loan.
Assume that a buyer is going to purchase a property and obtain a loan of $200,000 at 5 percent fixed for 30 years. If the interest rates increase to 6 percent, the buyer may pay up to an extra $50,000 in interest over the life of the loan. If the interest rates increase to 7 percent, the buyer will pay almost a $100,000 more in additional interest.
In other words, an interest increase of 1 percent results in about a 25 percent increase in interest over the life of a 30-year fixed rate loan. An increase of two points in interest results in a whopping 50 percent increase in the amount of interest paid. That’s why it’s smart to buy now, when rates are at historic lows.
So, here’s the bottom line: The next time a potential buyer or some other “expert” tells you that it is cheaper to rent than it is to buy, share the information in this column with them. If that doesn’t work, you may want to remind them that no matter what, they’re going to be paying someone’s mortgage – will it be theirs or their landlord’s?
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author. She may be reached at Bernice@RealEstateCoach.com.
