Courtesy Tony Guaraldi, VP of Mortgage Lending
Is the market too crazy? Should 1st time home buyers “rent for a while until the market slows down” and throw in the towel for now? Does it still make sense to pay these home prices or are they better off renting right now?
Rent or Buy in Silicon Valley?
The answer as to whether or not they should buy a home vs. renting when you look at the numbers is resoundingly YES!!! Let’s take a look at this example in Campbell . . .
A current listing on the MLS today is 1360 Hoffman Ln Campbell, CA which is a 3 bed / 2 bath with 1,331 square feet for the bargain price of $949,000. The typical first time buyer starter home is now around 1M in Campbell. If we look at Craig’s List for a similar place to rent this morning you can find 1638 Ensenada Dr, Campbell which is also a 3 bed / 2 bath house that is 1,284 square feet that is listed for rent at 3,600 per month.
If you look at the attached Rent vs Buy PDF document I’ve plugged in 1M purchase price because we all know the 949k listing will sell for over list price. I’ve also plugged in 3,600 per month for rent. With 20% down payment on a 1M purchase price the monthly payment including principal, interest, property taxes, and insurance is $4,822 per month. So you say this is way more than they would pay as a renter, but when you consider income tax deductions and principal reduction on the loan it’s not even close! The home owner’s True Cost in this scenario will conservatively be 2,681 per month saving $919 per month over the renter! When you factor in a modest 4% appreciation per year the home owner’s net worth will increase 271,000 over 5 years and 590,000 over 10 years compared to the renter! And this is not factoring in that rents go up over time!
Ok but what about the so called housing bubble and will the market crash if interest rates go up? Well let’s look at the numbers. For the above scenario if interest rates were at 6% the home owner’s True cost would be 3,622 per month slightly higher than the renter at 3,600. However if you factor 4% appreciation the home owner’s net worth would be up 215,000 over 5 years and 477,000 over 10 years. So even in a higher interest rate environment it will still be compelling to purchase a home verses being a renter. Again this does not factor in rents go up over time and maybe someday your 30 year fixed loan will be paid off!
Should the buyers today compete and pay over list price to get a house? Let’s look at what 4% rate versus 6% rate does because with rates in the upper 3% to lower 4% range for a 30 year fixed, the amount of the payment that goes toward principal each month is amazing! For an 800k loan at 4% the principal reduction is 1,153 per month or this is approximately 30% of the monthly principal and interest payment is going to principal reduction. For the 800k loan at 6%, $796 per month goes to principal reduction which is 16.5% of the monthly payment. So you are getting about double the bang for your buck at 4% versus 6% in terms of principal reduction. Should the buyers be aggressive in getting into a house and taking advantage of rates where they are at today? Yes!!!
CLICK HERE for the 1360 Hoffman LOAN Scenario.
CLICK HERE for today’s Mortgage Rates by Guaranteed Rate Mortgage.
Tony Guaraldi, VP of Mortgage Lending, tony.guaraldi@guaranteedrate.com
o: 408.841.4953 – m: 408.504.3295 NMLS ID: 293894