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Buying now 45 percent cheaper than renting?

Posted by Scott Van Voorhis September 17, 2012 08:43 AM

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So says Trulia in a new survey that compares the cost of buying with renting in the nation's top 100 metro markets.

And Greater Boston is supposedly right in the middle of this trend, with buying now a much better bet economically than renting in both the city and in the suburbs as well.

Still, while I have no doubt that soaring rents have once again made buying a more attractive option, I am having a hard time getting my mind around Trulia's numbers, which seem overly aggressive.

On the North Shore, buying is now 52 percent cheaper than renting, for a saving of $1,176 , while in the western suburbs, the differential is about $1,000 a month in favor of buying, for a savings of 45 percent.

In Boston, buying is now 41 percent cheaper than renting, for a monthly savings of $918, Trulia says.

I wouldn't go as far as to say you need to read the print here, but the devil definitely is in the details when it comes to such seemingly too-good-to-be-true numbers.

The savings are based on a scenario in which the home buyer qualifies for a 3.5 percent rate on a 30-year mortgage, puts 20 percent down, and is in the 25 percent federal tax bracket.

That, plus you need to stick with your new home for at least seven years.

If your mortgage rate is 4.5 percent, then the savings start to drop, down to 34 percent in the Boston area, compared to 41 percent with a 3.5 percent rate.

Then there's the methodology - it sounds overly complicated and certainly not based on a simple comparison between current asking rents and home prices. You be the judge - I have pasted below Trulia's explanation of the methods it used to generate its claims of huge savings.

Here's Trulia's explanation:

  •  First, we looked at all the homes for sale and rentals listed on Trulia in June, July and August 2012. On for-sale homes, we took the asking price and estimated what it would rent for; for rentals, we took the asking rent and estimated what it would sell for. That way, we can calculate the average rent and asking price for an identical set of properties in a metro area, for a direct apples-to-apples comparison. By looking at homes currently for sale or rent, we're able to illustrate the actual housing options that consumers face right now.
  • Second, we estimated the total costs of renting and buying for the typical property in a metro over a seven-year period. We factored in all the costs of homeownership (e.g., closing costs, maintenance, insurance, taxes, etc.), along with the tax benefit of deducting mortgage interest and property taxes, as well as the proceeds from selling the home after seven years with modest home price appreciation. On the rental side, we factored in renters? insurance and the security deposit.
  • Finally, we calculate the net-present-value of all those costs to capture the opportunity cost of tying your money up in a down payment. This gives us the total cost of buying versus renting. We then calculated the dollar difference and percentage difference between renting and buying.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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