Rent or Buy? The Answer is in the RATE!

Mortgage rates are at the heartbeat of my business, offering the greatest insight into whether homeownership is affordable.  So it’s no surprise that when headlines scream that rates are on the rise while others declare that rates are historically low, borrowers have questions and concerns.  Historic context is key to understanding how rates behave – and the key to understanding where we are today. The downward trend of rates the last 20 years will prove that buying a home truly is a better option than renting.  Sure prices have been on the rise, and that makes buyers freak out.  But that’s just part of the equation.  We’ve talked about the Home Affordability Index before, so not going to beat that drum today (basically, the HAI considers price, rate and income to determine how affordable buying a home is).  And while price certainly plays a role, rate is what is the driving factor in payment – which is what matters when considering affordability and comparing to rent.

Let’s consider a couple of things:

1) Rates have been falling for years

We’ll use the 30-year fixed-rate mortgage as a benchmark since they’re the most popular home loan option in the U.S. and often used as a basis for news and research findings. Take a look at this chart showing the 20 year trend line for the 30 year fixed rate mortgage.

As you can see, rates on 30-year mortgages peaked at just over 8 percent in 2000 (they were as high as 18 percent in the early 1980’s). Rates have been on a steady decline over the last 20 years. Sure, there have been ups and downs — the most dramatic of which was the credit crisis that drove rates to historical lows. But even today we find ourselves in close proximity to where we were then.

2) Buying a home was a bargain back then. It still is today.  What about renting?

In June 2000, the median price of a home was $140,000 and the rate on a 30-year mortgage was 8 percent. If a borrower financed this at a 90 percent , the principal and interest payment was approximately $925 a month. Compare that to 2017 when the median  price of a home is $245,000 and the 30-year mortgage rate is 3.8 percent. If a borrower finances this at a 90 percent, the P&I payment would be approximately $1,025 a month. This shows that in the span of 17 years, the average mortgage payment has increased by just $100 for P&I (an 11% increase).

Rental rates, meanwhile, continue to rise with no sign of slowing down. In 2000, the median rent in the US was $602.  By 2015 that number had grown to $959 (a 60% increase in just 15 years).

The bottom line: Homeownership over time is a better investment and more affordable than renting – and even more so in today’s low rate environment.

Thanks to my friends at Movement Mortgage for this data!

Bonds have trended up a tad over the past week and a half, but still well below our lowest rate point of the year back in late August.  30 year fixed conventional still hanging below 4% and FHA under 3.5% for good credit buyers.