Do the math: Should you rent or buy a house? It used to be an easy choice (buy, of course) but with the change in the housing market that is no longer true. Today you need to take a look at the numbers.
A great way to figure this out (according to a Zillow analysis) is by looking at the ratio of home prices to the annual rents of comparable properties in your city. If you can buy a home for less than 20x the annual rent then it is a good idea. However, for many cities this is no longer the case. For example, in San Jose, California the price to buy a home is more than 20x the annual rent for the same property. This means that the interest on your mortgage will likely cost you more than renting that same property. San Francisco and LA are right at the ratio cutoff and will therefore have a similar outcome. However in cities like Chicago, where sale price/annual rent is 9.3, it a great place to buy a home. The same can be said of Miami and Dallas where the ratio is 9.0 and 8.5 respectively.
Keep in mind that when buying a home, a chunk of money goes to fees, taxes and interest rather than straight towards your home’s equity. These extraneous costs do not increase the value of your home nor do they reduce the principle on your mortgage. While one benefit to renting is that the cost is offset by the interest you make on the cash you didn’t put towards a down payment, something similar could be said of homeownership. The costs there are offset by the tax deduction you get on your mortgage interest payments.
It’s true, there are a number of reasons to consider renting over buying or vice versa, but simple mathematics provides you with a quick and easy way to make the right decision for you.
via Business Insider