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Real estate: Should you rent or buy in 2014?


 

SANTA ANA, Calif. – Dec. 4, 2013 – As 2013 draws to a close, it’s fairly clear that the real estate market has gained strength: home sales are up, prices have firmed, foreclosures are down and mortgage rates remain close to record lows.

Figures from the National Association of Realtors® (NAR) show that September home values on average were 11.7 percent higher than a year earlier, the 10th consecutive month of double-digit, year-over-year, increases. NAR also reports that in the third quarter home prices increased in 144 out of 163 metropolitan statistical areas. Fifty-four areas had double-digit increases, and only 19 had price declines.

“What we have seen during the past year are signs of a broad national recovery,” says Ray Brousseau, executive vice president with Carrington Mortgage Services. “Pent-up demand and a growing population are two factors that have contributed to generally increased home prices.”

Interest rates
Interest rates also make ownership more attractive. According to Standard & Poors, the 30-year mortgage averaged 6.1 percent between 2002 and 2007. Over the longer term (the last 40 years), the historic average has been 8.6 percent.

In comparison, mortgage rates were near 4.25 percent in October 2013.

Lower rates over the past few years substantially impact affordability. For example, a $175,000 mortgage with an 8.6 percent interest rate has a monthly cost for principal and interest of $1,358 over 30 years. The same loan with a 4.5 percent interest rate has a monthly expense of $861. Though mortgage rates have increased modestly since June this year, rates remain low by historical standards.

Housing costs

While home prices have risen over the past year, they have haven’t reached the peaks seen in 2007. From August 2012 to August 2013, house prices rose 8.5 percent; however, home prices were still 9.4 percent below their April 2007 peak, according to the Federal Housing Finance Agency.

Rental costs

While buying has become more attractive in recent years, rental costs have risen.

Census Bureau data shows that the third-quarter vacancy rate was 8.3 percent – down from 11.1 percent in 2009. With fewer vacancies, rental rates are rising, and, at the same time, rental options have become more limited.

When rental units are inexpensive and easily available, leasing can be an attractive choice. But as more people compete for rental units, rates tend to go up.

Home appreciation

When the value of real estate goes up, owners benefit from higher prices and increased equity. Tenants, on the other hand, have no ownership interest in the units they occupy. If values go up, it’s good news for their landlords.

“We don’t know that the value of residential real estate will always appreciate,” said Brousseau, “But we do know that when home prices rise, the benefit goes to owners. We also know that only owners have the ability to reduce mortgage debt through amortization, the gradual reduction of mortgage principal over time. This means that over the long run, it becomes possible to own a home without any underlying debt. Homeownership, in turn, can be a way to save and has been an important source of household wealth for many generations.”

© 2013 Florida Realtors®

Related Topics: Buyer services