The Meyer’s Edge concurs that in today’s affordability-constrained market, the rental market is for-sale housings’ direct substitute. Meyers Director of Economic Research, Ali Wolf notes, however, that in today’s low-rate economy, the monthly payment favors homebuying in certain instances.
With incomes rising, home price appreciation slowing, and mortgage rates sub-4.0% for the sixth consecutive month, Wolf wanted to see how housing payments stack up against the rental market. For this exercise, Meyers considered different down payments using a baseline of 4.0% for the mortgage rate.
The math consistently favors owning when the buyer is able to do a 20% down payment. For reference, the median down payment nationally is 12% for all buyers and 6% for first-time buyers.
The math can still favor owning with a 10% down payment. A down payment below 20% almost always comes with an extra cost in the form of private mortgage insurance. Even still, there are many metros where the estimated mortgage cost is below the median rent. The Los Angeles metro is a clear exception where the shift in down payment makes owning $530 more expensive than renting.
The monthly cost of owning is generally more expensive with a 3.5% down payment. Meyers’ simple calculation exemplifies what we already know: entry-level demand is financially challenged. In some cases, however, the spread between the two payments is equivalent to just one dinner out a month.
Wolf notes that payment is rarely the end-all. Shoppers will consider, among other things: market conditions, projected appreciation, the ability to use tax deductions, anticipated length of stay, cost and time associated with maintenance, and bang for the buck.
The Meyers advistory team urges builders to remain extremely focused on keeping their average selling price down by introducing smaller product at lower prices and, in some cases, be willing to help with closing costs. “In the meantime, let’s hope the bank of mom and dad opens their doors to help their down payment-constrained children,” Wolf says.