The residential real estate market for both home buyers and renters in the past year has been challenging to say the least. Both homes for sale and rental units have increased in price significantly over the past year and the market appears to be poised for more growth in the new year. As a mortgage loan officer, I get asked often whether it is better to rent or buy, so I wanted to put together an informative article focused on our Phoenix housing market that clearly spells out the pluses and minuses of renting vs buying a house.
Renting vs Buying Pros and Cons
There are pros and cons to each choice of how you want to live. And each of us decide on our living arrangements based on different factors such as our employment, our income, and how long we plan to stay in a community or even the city we live in at the moment. Once those decisions are made, then we can evaluate whether it is better for us to rent or buy in our current living situation.
Here are some renting vs buying pros and cons that might help one to make the rent vs buy decision.
Renting Pros and Cons
Pros
Freedom to move/Nothing to tie you down
No maintenance costs
Monthly payment remains the same for the term of the rental agreement
Upfront costs are lower than those for buying a home
Cons
No building any home equity
Rent will be increased every year
Limited ability to customize the home to your liking
If the rental is privately owned, the landlord may sell forcing you to move on short notice
Buying Pros and Cons
Pros
Owner builds up home equity
Home appreciation has been strong in Phoenix the past several years
Unlimited ability to customize your home
Tax benefits of home ownership
Build sense of community by establishing a permanent residence
Cons
Home values may decrease
Maintenance costs are ongoing and can be expensive
Must save up for a down payment and closing costs
Can be expensive to sell the home and move
Is Buying Really Cheaper than Renting?
The most important factor when assessing whether buying is less expensive than renting is how long you plan to stay in the home. For shorter term living arrangements, renting a home is normally the less expensive option. But for longer term, more permanent living arrangements of five years or more, the numbers typically show that buying is the better option for most.
According to the website Realtor.com, rents in 2022 are forecasted to grow nationally by 7.1%. In Phoenix, they are forecasting home prices to grow at a 6.8% rate. This means rents will grow at a faster rate than home prices which is another reason to look at buying a home if you live in the Phoenix area.
Some other statistics about the Phoenix rental market that are worth noting, rents have increased in Phoenix area cities from 15% – 20% on an annual basis in the past year and are near all time highs.
In addition, this year has seen the fewest available rental units on the Phoenix market which had a 97% occupancy rate for the year.
With so many renters competing for so few available units, landlords have taken advantage of the situation to increase rents in response to the increased demand. And with 200+ people per day moving to the Phoenix area there appears to be no slowing down the rental market.
So, with rents projected to keep increasing this year, if you find that you plan to stay in the Phoenix area for an extended period of time and you know you like the neighborhood where you live, it might be a good time to think about buying a home if that is financially feasible for you.
To learn more about some of the costs of renting vs buying a house, take a look at this rent vs buy calculator which is a good tool to work with to see how the numbers work for your particular situation.
Phoenix Housing Market: Renting vs Buying a House
The Phoenix housing market has seen historic growth over the past two years and homeowners have seen some of the highest home price appreciation on record in Phoenix. In our recently published Phoenix real estate housing market forecast we predicted that housing prices will continue to increase in 2022 but they will do so at a slower, more measured pace.
I am a strong supporter of buying a home because I have seen firsthand how long term renting affects a family. My own Mother rented for 30+ years in multiple cities and many different apartments. I grew up living in apartments so I am intimately familiar with renting and apartment life. My conservative estimate is that over a 30-year time period, my Mom paid more than $350,000 in rent and she had nothing to show for it in her lifetime.
And as she got older and was on a fixed income, I saw how it became harder to keep up with rising rents to afford to keep a roof over her head. So, while I understand the argument of how convenient renting can be, long term, renting has the ability to prevent you from securing a roof over your head in good times and bad, and renting prevents you from building the wealth that comes with homeownership.
So, if your financial situation allows, I am all in favor for buying a home if the numbers make sense for you. And with that said, I looked at some of the rent vs buy numbers for the Phoenix real estate market and here are some of my findings.
Median Sale Price: $424,000
Buy, monthly payment: $2,144
Buy, percent of Income: 39%
Average monthly rent in Phoenix, 2-3 bedroom: $2,350
Rent Percent of Income: 43%
For the monthly rental costs in our example above we used estimated Phoenix area rents based on numbers from Apartment List. The typical home sold in Phoenix has at least 3 bedrooms, so we used monthly rents for comparable size rentals. I didn’t feel it was an equal comparison to compare the monthly cost of a 3-bedroom home to the cost of a 1 bedroom, 900 sf rental unit. So, I tried to keep the comparison in monthly costs as much as possible to similar sized properties.
With costs where they are today, it makes more sense to buy a home vs rent in most cases. However, in a short-term situation, it could be smarter to rent if you will only remain in the Phoenix area for a short period of time. This is because buying a home involves having a down payment and closing costs saved and ready to go when buying a home.
Over the long term, say a minimum of five years, the home buyer starts to recoup those upfront costs. And with a fixed mortgage payment staying the same each year, rents tend to increase 3% to 6% annually, so as time goes on the benefit of buying a home becomes clearer for renters. The long-term costs of not owning a home can be devastating to the families of renters.
Long term renters lose out on both the ability to have a forced savings account that comes from paying a mortgage each month and the home appreciation that comes from owning a home. There are also potential tax benefits of owning a home that are not available to those who rent their residence.
You might save a few pennies by staying in a rental for a few years and that comes with the freedom to move and the convenience of not making a financial commitment to a home purchase. But renting an apartment for more than a few years is not financially in one’s best interest and anyone with the financial means and a plan to stay in the same city for the long term should start to plan their homeownership journey.
In my opinion, and while renting, I would do whatever it takes to pay down debt, not take on a large car payment, and save diligently each month to prepare to buy a home. Owning a home is the single best way for most of us to build wealth and this opportunity should not be missed for the average wage-earner.
If you would like my help to put together a plan to buy a home, please reach out to me to set up a FREE mortgage consultation by contacting me by phone at 480 365-8978 or email at steveATthehomebuyinghub.com.
Recent Comments