As 2013 draws to a close, it's fairly clear that the real estate market has gained strength: home sales are up, prices have firmed, foreclosures are down and mortgage rates remain close to record lows. "For a lot of people, the stronger real estate marketplace seen during the past year suggests that now is the time to buy a home," said Ray Brousseau, Executive Vice President with Carrington Mortgage Services, a lender active in more than 40 states. "Not only are we seeing solid appreciation in most local markets, but at the same time interest rates are low and rental rates have gone up. The combination of rising real estate values, low mortgage rates and higher rents are causing many people to reconsider the rent-versus-buy question."
The Changing MarketplaceFigures from the National Association of REALTORS® (NAR) show that September home values on average were 11.7 percent higher than a year earlier, the 10th consecutive month of double-digit, year-over-year, increases. NAR also reports that in the third quarter home prices increased in 144 out of 163 metropolitan statistical areas. Fifty-four areas had double-digit increases, while only 19 had price declines. "What we have seen during the past year are signs of a broad national recovery," said Brousseau. "Pent-up demand and a growing population are two factors that have contributed to generally increased home prices." Interest rates are another factor that has made ownership more attractive. According to Standard & Poors, the 30-year mortgage averaged 6.1 percent between 2002 and 2007. Over the longer term (the last 40 years), the historic average has been 8.6 percent. In comparison, mortgage rates were near 4.25 percent in October 2013.The lower rates seen during the past few years substantially impact affordability. For instance, a $175,000 mortgage with an 8.6 percent interest rate has a monthly cost for principal and interest of $1,358 over 30 years. The same loan with a 4.5 percent interest rate has a monthly expense of $861. Though mortgage rates have increased modestly since June of this year, rates remain low by historical standards and most analysts are expecting to see current interest rates maintained in 2014. The Hidden DiscountWhile home prices have risen during the past year, they have still not reached the peaks seen in 2007. According to the Federal Housing Finance Agency, from August 2012 to August 2013, house prices were up 8.5 percent; however, home prices were still 9.4 percent below their April 2007 peak."Not only are interest rates well below historic norms, home prices are still recovering," said Brousseau. "The combination of low rates and low prices makes real estate very affordable for large numbers of potential buyers, including individuals who may have felt frozen out of the market several years ago."Cheaper To OwnWhile the buying option has become more attractive in recent years, rental costs have risen.Data from the Census Bureau shows that the third-quarter vacancy rate was just 8.3 percent -- down from 11.1 percent in 2009. With fewer vacancies it should come as no surprise that rental rates are rising, while at the same time rental options have become more limited."When rental units are inexpensive and easily available, leasing can be an attractive choice. However, what's happened in many markets is that rental demand has increased. And as more people compete for rental units, rates naturally go up," Brousseau explained. "When people look at what they're paying for rent and compare that expense with what it costs to own a home after taxes, ownership can suddenly become very attractive," said Brousseau. "A homeowner can typically write off mortgage interest and property taxes, deductions which are unavailable to tenants."What About Appreciation?When the value of real estate goes up, owners benefit from higher prices and increased equity. Tenants, on the other hand, have no ownership interest in the units they occupy. If values go up, it's good news for their landlords. But even if the home price appreciation is modest, owning a home is an excellent way for families to build their savings by paying down the mortgage loan."We don't know that the value of residential real estate will always appreciate," said Brousseau, "But we do know that when home prices rise, the benefit goes to owners.""We also know that only owners have the ability to reduce mortgage debt through amortization, the gradual reduction of mortgage principal over time. This means that over the long-run it becomes possible to own a home without any underlying debt. Home ownership, in turn, can be a way to save and has been an important source of household wealth for many generations."In fact, homeownership is a very big deal. The Federal Reserve says that in the second quarter, the value of residential real estate owned by households increased by more than half a trillion dollars.Little Cash Up FrontWhile all-cash transactions have gotten a lot of media attention, qualified buyers can still purchase an attractive residence with little down. According to the National Association of REALTORS®, in the past year, 39 percent of all first-time buyers bought with FHA financing, while 9 percent financed through the VA."Loans for first-time buyers with 3.5 percent down or less are entirely common," said Brousseau, the Carrington Mortgage executive. "Low down payments make the rent-versus-buy discussion much clearer, especially when you consider today's low rates. For many of today's renters, the move to ownership is not really much of a leap."