For many folks who believe they cannot afford to purchase a home, renting is a logical and fiscally responsible alternative. But today, many renters are quickly learning that leasing isn’t so comparably affordable after all.
RealtyTrac reports that one-third of Americans currently reside in a housing market where leasing a three-bedroom home costs more than 30 percent of monthly median income, which is typically considered the affordability limit benchmark. Additionally, data released by in late 2013 by the Harvard Joint Center for Housing Studies show that:
• Half of American renters fork over more than 30 percent of their income on leasing, up from 19 percent of income just a decade ago.
• The number of Americans renting has risen from 31 percent in 2004 to 35 percent in 2012.
• Real median rents nationally increased by 6 percent (adjusted for inflation) between 2000 and 2012, despite the fact that real median income of renters decreased by 13 percent.
To determine if you’re paying too much in rent, start by doing some homework.
“Research prices in your neighborhood, factoring in the quality of your current space,” says Rick Gersten, president of Urban Igloo, an apartment finding service based in Washington, D.C. “If your space is comparable to other apartments nearby, and your rent-to-income ratio is under 30 percent, than the rent is probably acceptable. Conversely, if you find yourself financially squeezed, even at or under the 30 percent guideline, a compromise in location or quality of the space might be reasonable to consider.”
However, Allison Goodhart, a real estate agent with McEnearney Associates in Alexandria, Virginia, says the 30-percent rule doesn’t always apply. “If you have a lot of student loans or alimony payments, or if you are self-employed and don’t have a steady paycheck, you might want this (percentage of median monthly income) to be lower,” she says.
A report published in February by Trulia revealed that, thanks to continued low mortgage rates, buying a home still beats renting in 100 major metropolitan areas of the country, despite rising home prices. Mortgage interest rates would have to reach 10.6 percent (which they haven’t done since 1989) for renting to become cheaper than buying nationally.
Gersten said renters still on the fence about whether to buy a home or continue leasing should calculate their price-to-rent ratio, which requires:
1. Finding two similar residences – one for sale and one for rent.
2. Dividing the sale price of the home by the annual rent for the other.
According to Trulia, a PRR of 1 to 15 indicates that it’s much better to buy than rent; 16 to 20 suggests it’s typically better to rent than buy; 21 or higher signifies that renting over buying is a no-brainer.
It’s more beneficial to buy if you have a stable job, access to cash for a sufficient down payment, an emergency fund to pay for the unplanned expenses, plan to remain in the home for more than a few years, an expectation of reaping tax deductions for owning a home and paying a mortgage loan, and a belief that the home’s price will rise in the future, says Sandy Shore, compliance and counseling relations officer for Novadebt, a consumer credit counseling service in Freehold, New Jersey. But be sure your debt-to-income ratio is in line with what lenders expect.
“A preferred debt-to-income ratio will vary, depending on the borrower’s circumstances and the type of mortgage they’re pursuing,” Shore says. “A conservative figure is that this ratio is between 28 to 31 percent, but can go as high as 43 percent, according to new rules put in place by the Consumer Financial Protection Bureau.”