Rent, Buy, or Bye?
By Datta Khalsa, Broker
With the Fed implementing yet another increase in interest rates, as much focus as there has been on the plight of renters, a recent report on Realtor.com indicates that, in all but 5 of the top 50 real estate markets in the country, on average it is still about $800 per month less to rent than to own. The 5 markets where it was reported that it is cheaper to buy instead of rent were Memphis, Pittsburgh, Birmingham, St. Louis and Baltimore. Predictably, the list did not include Santa Cruz County.
With inventory tight for both renters and owners alike, our market remains among the toughest places to either rent or buy. Here, a typical 3 bedroom home these days rents for $5,500 per month, while the Median home price in January held steady at $1,160,000. It so happens that this figure is pretty close to the price for a base model 3 Bedroom/2.5 Bath 1450 SF home in a new subdivision of 15 townhouses that we are bringing to market in Soquel this Spring, and I’ll touch more on that later here.
With FHA loan rates currently hovering around a 6.7% APR, if you have good credit and 5% for a down payment, unless you want to pay additional points on top of the $53,000 you saved up, at the current Median Home Price here you’ll be paying around $8,500 per month for your mortgage, including your Property Taxes and HOA dues if you’re in a Townhome, along with PMI for the first 10 years.
If you can come up with 20% down the picture improves, with your total payments coming to around $6,900 per month, out of which your interest and property taxes are deductible. Under the new progressive income tax schedule, for taxpayers at the cusp of the 35% bracket (currently at $231,250 for a single filer or $462,500 for a married couple filing jointly), the blended rate for deductions looks to be around 19%, which if applied to a home at the current County Median will get you back around $500 per month in deductions.
For our subdivision in Soquel, the interest rate hikes appear to have knocked out of eligibility the 2 low-income units we had set aside under the County’s Measure J inclusionary housing program, whose applicants’ income levels can’t qualify for a loan. So instead, we are looking into paying in-lieu fees and funding a 2/1 rate buy down to help get our buyers’ interest rates down to 4.99% during their first year, which should bring their mortgage payments down by another $1,000 or so per month. With this final push, along with their homeowner’s deductions it should put them on equal footing with what they would likely have to pay in order to rent.
More importantly, instead of them being forced to move out of state to find a place to live, we hope to help put a few more people onto the path of home ownership locally where they can start paying down their principal with the idea to refinance once rates settle back down. And at the end of the day, that strikes us as a cause well worth contributing to.