Is Buying or Renting Cheaper for Millennials?

Is Buying or Renting Cheaper for Millennials?

Posted 12/18/2015

Northlands Maracay Homes

People of all ages have asked themselves this question at one time or another during their search for a place to live: Which is cheaper, owning or renting?

While the price gap may have narrowed over the past few years, buying is still a better bargain than renting in most communities across the country – including Phoenix and Tucson – according to Trulia, an online real estate company.

Trulia has been tracking the advantages of buying vs. renting in the 100 largest U.S. metropolitan markets since 2012. Traditionally, the research has assumed three main conditions: the buyer will stay in the home seven years; federal tax deductions are itemized in the 25 percent bracket; and there is a 30-year, fixed-rate mortgage with a 20 percent down payment. Based on these assumptions, buying a home at September prices was 36 percent cheaper than renting, nationally.

But now, for the first time, the company has taken a look at the rent vs. buy proposition through the eyes of Millennial homebuyers (ages 25-34). Using the Census Bureau’s American Community Survey and a new Truila consumer poll, the company tweaked the assumptions slightly to reflect the behavior of younger buyers, who may plan to stay in a home only five years; itemize federal tax deductions in the 25 percent bracket; and have a 30-year, fixed-rate mortgage with a 10 percent down payment. Under these conditions, buying is not only 23 percent cheaper than renting nationally, it also is cheaper than renting in 98 percent of the nation’s top 100 markets.

Honolulu and San Jose are the only exceptions. Buying a home is 5 percent more expensive than renting for Millennials in Honolulu and 2 percent more expensive than renting for their counterparts in San Jose. The company’s calculations take into account the cost of buying and renting for identical sets of properties, including maintenance, insurance, taxes, closing costs, down payment, sales proceeds and monthly mortgage and rent payments.

In Phoenix and Tucson, the rent vs. buy margin for Millennials is on par with the national average of 23 percent. Even so, the gap has narrowed since 2012, when it was 41 percent cheaper to buy than rent in metro Phoenix, and 35 percent less expensive to do so in Tucson.

So, when would we reach a tipping point where renting becomes cheaper than buying? It’s hard to say for sure. Overall, Trulia economists predict interest rates would have to hit roughly 6.5 percent to equalize the rent vs. buy equation for young buyers.