If your mortgage is lower than the rent that means your location appreciated very significantly. Given stagnant prices mortgage being lower than rent doesn’t make sense. Now the question for someone buying today is if they expect that to happen in the future. For me the answer is not positive enough to gamble buying a place.
If rent really is lower than the mortgage payment (assuming the alternative return on the downpayment is taken into account, etc) for an equivalent property, then buying is pretty reasonable in most circumstances.
I'm observing rents way, way below mortgages, but it's very location dependent.
When making decisions about where to put my money, I stopped worrying about what other people are going to do and are doing, what the market might do, etc, and instead think what makes _sense_ for me to do. If some expense makes sense for me, offers good value, etc, independent of attempting to prognosticate the future, it probably does for others as well and the investment will probably work out fine. If it doesn't, it doesn't matter, it still made sense for me to do it.
For me, this has meant buying a house when lots of my peers were running scared at what turned out to be the bottom of the housing market, selling one recently, and renting for the moment. In each case, this was just the cheaper and 'sensible' approach. I think people overcomplicated this stuff.
Someone who bought their house in 2006 still has the same mortgage payment (actually, perhaps lower if they were able to refinance).
Buying things for the future (whether housing or cattle futures) does offer price stability and insulation from market fluctuations. It doesn't automatically make it a good investment; but stability is good, and it's perfectly rational to assign some positive value to it.
I was just trying to put things in perspective. There are perfectly rational reasons to buy a house. When the rents are higher than what a mortgage payment would be, it's a pretty reasonable thing to do for a lot of people, based on some pretty reasonable projections.
You can still disagree, of course. You can say that 1.5% growth per year in home value is too much to ask. You can say that rents will fall, therefore making your mortgage payment higher than rent. Or you can say that a 7% return is not good enough for you. Or maybe my analysis was wrong, in which case you can point that out.
The market around me is the opposite. The single family home I bought was just remodeled with modern amenities and the house is in a nice walkable neighborhood. The rentals around me costs less than my mortgage but they're not nearly as nice. I'd be willing to rent a place like mine, but there simply isn't any rental inventory like it. Maybe above a certain price people would rather spend that on a mortgage than rent.
I'm in NYC. Even if I bought something with a monthly down payment comparable to my current rent, it would be a lot less nice than the place I'm renting now. It would also be in a worse location. Even if I decided to do that, the down payment is a major issue. My savings grows, but the prices grow faster. I would need a sudden financial windfall of at least a few hundred K in order to buy. If I did receive such a windfall, and I found the right place, then I think I would end up buying. But I don't see that happening any time soon.
In most cities, rents are lower than mortgage payments, because rent is a multiple of when the house was purchased, usually not the price to purchase the house this year.
If I buy a house in 2009 when the market is depressed, and by 2023 the value of that house has gone up immensely, but my mortgage is still based on my 2009 purchase, I can charge less to rent it out than it would cost someone to buy it. Or I can charge the going rate, and hope I find someone willing to pay it.
But if I'm on the other side of the table, it is usually cheaper and easier to rent a house from someone who bought it years ago than it is to buy a similar house myself.
As someone that has been exploring real estate for the first time, after speaking with some people it seems that mortgages have generally been less expensive than rent? Good luck finding something like that with today's prices and interest rates.
But are rents higher than the mortgage + insurance + maintenance + lack of liquidity + the potential home value changes.
If the expectations is that the home value are dropping, the math seems pretty simple.
But in a different financial environment, maybe a few years from now, your expectations might be different and the math works out differently
"Renting a crappy 2BR apartment was $1700/month thanks to the tight rental market. Mortgage and taxes on a townhouse in a nicer part of town? $1200/month."
So you take a mortgage and you're happy and there is a chance that you'll stay happy because your present reckoning may remain as good in the future as it is now. But it also may not. By mortgaging you become a sitting duck against the change, and that rental business of $1700/month seems attractive enough to invite further involvement and development thus driving the prices much lower not only compared to its current figure but also with the praised rental figure. What would you do then if this happens? Refinance in order to stretch that mortgage for more than 30 years?
This is essentially Toronto. There is a fairly big delta between mortgage payments (with a reasonable downpayment) and rent. If you only care about monthly cash flow, renting is a far better option. For the last decade the wisdom has been that buying a place is a good idea, despite the cash flow delta, due to appreciation. If people no longer believe this to be true, there could be a sharp shift in the housing market. Perhaps we’re seeing the beginning of that.
It’s not a bad time if you get a good deal. I bought when rates were at 3.25 but I just saw a place on Zillow that probably would have met my needs for more than a hundred thousand less than I paid for my place.
Compare your total cost to renting. If you can own for about the same price as renting, do it. Even if it’s not optimal every dollar you spend on rent is gone. With a mortgage at least some of that is principal.
Do we think housing prices will crash? Probably not. There’s a housing shortage.
Fair enough, I did not sufficiently qualify my statement. But my main point is that looking at just mortgage vs rent is leaving a lot of costs out of the equation.
If you can get rent for less than the monthly mortgage payment, then the landlord is basically subsidizing you to live there and it's a pretty great deal. Buying in those conditions is a sucker bet.
I actually don’t think you should be renting right now. Even if house prices were to fall by 20% tomorrow it would still be cheaper to own than to rent in most cities right now. That may not be true as interest rates move higher down the road.
> A mortgage payment is always less than rent for an equivalent property, anyway.
Not always, though they often track closely to reach other, they can also diverge. If rent is high and home prices are low that could be a good signal to buy.
And you also have to consider what you equity would be doing if it was invested in something other than your house.
Do you live in a slow real estate market? In the area I'm in, rent is basically equal or slightly higher than a 30 year mortgage with 20% down - if you can find a house to buy in the first place.
Just anecdotal, but we're perfectly capable of owning in the place we recently moved (Portland), but are renting because of market uncertainty. I'd rather miss out and have homes go 100 up than miss out and have them go 300 down right after purchasing. We're happy to rent for a bit and wait it out.
I'd guess more generally people are playing that game purely based on borrowing rates -- if they think they'll be even a bit lower in 12 months, it might make financial sense to wait.
> Mortgages tend to be equal to rent in the long run due to efficient market reasons.
Not really, the property price and mortgage rate you pay is what you individually agreed to, not whatever the "efficient market" says it may be on average "in the long run".
There's tons of macro factors that are currently driving real estate prices well beyond what's justified by potential rent income. You're most likely better off renting.
In cases where rent exceeds the mortgage, I think the reasons would be to cover the cost of capital, risk, and operational expenses. In this case, the long term expected value of the property might be flat or growing at a lower than average rate so future expected gains can't be used to offset short term losses.
If this wasn't the case, in theory renters would just become buyers themselves.
The rent is higher but people will still take it for a lot of reasons. Inability to get approved for a mortgage, not wanting to deal with the sales process if you expect to move around a lot, etc.
I tried to sell my old house and despite being priced low just to get it sold, it sat on the market after we had already moved. We ended up deciding to see if we could rent it but weren’t sure how the process would go. In our area we didn’t see any home rentals listed except for a couple that were excessive (double what a mortgage would cost).
After months of not selling, we listed it for rent at a price I thought nobody would pay and it rented in 1 day, sight unseen. The renters insisted on paying a deposit as soon as possible because they didn’t want to lose the property.
For a first dip into the home rental market, I was shocked at how high the demand was.
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