With rents rising and mortgage rates at historic lows, buying can now be the more economical choice.
With rents rising and home values stagnant, buying a house in the Twin Cities can be hundreds of dollars a month cheaper than leasing an apartment.
There's been a dramatic shift in the economics of buying a home that has made it much more affordable. Buyers have the advantage of record-low mortgage rates and sagging home prices, while those who lease face higher rental costs because of the soaring demand for apartments.
It's a reality that defies the conventional wisdom of recent years that homeownership is a losing proposition and that it's much more advantageous to rent. With virtually no new apartments built over the past decade and demand on the rise, apartment vacancies in the Twin Cities are near record lows and property managers are apt to increase rents.
"I think that suggests that there's value in housing," said Celia Chen, a senior research director for Moody Analytics. "And it's probably a good time to buy."
Chen says Moody's rent ratio for the Twin Cities (the price of a typical home divided by the annual cost of renting a home) is now 13, down from a high of 21 in 2006. For prospective homeowners, a lower ratio means owning is more attractive than renting. The current index is slightly below the measure's historical average -- often considered the balance point between buying and renting.
Trulia.com, which also tracks rents compared with house asking prices, said that its rent/buy ratio is 8.3. A ratio of 15 or less means that buying is more affordable than renting, and that was true in all but two of the 100 metro areas recently tracked.
Such calculations don't take into account many of the costs associated with buying a house, including transaction fees and maintenance. But because the savings can be substantial, many longtime renters are taking a hard look at how buying can lower their monthly expenses.
The benefits of owning are clear to Chris Grobmeier, who's been renting an Eden Prairie apartment, but recently decided to buy. The payment on the two-bedroom townhouse in Chanhassen that he's buying will be nearly $500 a month lower than his rent, which will increase at the end of the month.
For Linda Swanson of Eden Prairie, the decision to buy was motivated by personal and financial reasons. Swanson, who is in her 50s, has never owned a home, and certainly never thought she would. "But with mortgage rates so low, there was no reason not to," she said.
The rent on her apartment is about to go up, and her daughter has moved home since completing her master's degree, so they decided to pool resources and shop for a house they could share. They also wanted something Swanson could still afford if her daughter moved out.
They found a two-bedroom townhouse in Bloomington that had gone through foreclosure. The asking price of less than $150,000 fit their budget, and with 1,300 square feet on two levels, there was plenty of room. Swanson plans to take the upper floor, which will have her own bedroom, bathroom and living space, while her daughter will reign over the lower level, which includes a private entrance.
The deal closes in July. Swanson estimates that they'll pay about $1,060 monthly - about as much as she'd pay for a rental apartment with about half of the space.
"If we split the cost, I'll be paying less for more living space," she said.
And, the townhouse has several amenities that she didn't have in her apartment, including central air.
Swanson's agent, Pamela Benbow of Coldwell Banker Burnet, said she's received several calls recently from prospective renters who all said they were facing rent increases and wanted to look at buying. Surprisingly, she said, many of those calls came from middle-aged people who were long committed to renting. Her theory is that they are trying to lock in their housing expenses before retirement.
"I think they're watching their dollars," she said.
Benbow also thinks many are motivated by an increasing number of lending incentives, especially for first-time buyers like Swanson. That includes downpayment assistance and loan programs that allow buyers to roll fix-up costs into the mortgage. Amy Peterson of Edina Realty has a client who is buying a HUD-owned townhouse in Coon Rapids that she'll buy and fix-up using a 203K rehab loan. The monthly payment on the mortgage and the fix-up loan will still be less than what she'd pay for a comparable rental.
While former renters are creating additional demand at a time when housing supplies are already historically tight, it's unclear whether the trend will lift home prices. Experts say buying isn't the right decision for every renter, especially those who need the flexibility that renting offers.
Tight credit also remains a major hurdle for those looking to buy. Jed Kolko, chief economist and head of analytics for Trulia.com, says limited access to credit means that buying won't be an option for a huge number of renters, especially those who are renting because they went through a foreclosure.
Still, Jolko said that with house prices up only 1.8 percent and rents rising twice as fast over the past year in the Twin Cities, renters need to do the math.
"Since rents are rising faster than prices," he said. "Buying is getting more affordable."
Jim Buchta • 612-673-7376