Market Update: Comparison of a Mortgage Payment to a Rental Payment

Market Update

Fletcher Wilcox
V.P. Business Development & Real Estate Analyst, Grand Canyon Title Agency, Inc.

 

HOW BIG IS THE SINGLE-FAMILY HOME MARKET IN MARICOPA COUNTY?

There are 1,043,000 single-family properties in Maricopa County. Single-family properties are by far the most popular residential product to own. Over 80 percent of sales this year on the Arizona Regional Multiple Listing Service, Inc. (known as ARMLS) were single-family homes. Owning single-family homes for rent is also popular. Twenty-six percent, or 273,000, of the single-family homes in Maricopa County show up in the county records as non-owner occupied.

PURCHASE PRICES AND RENTAL PRICES STEADILY INCREASING FOR SINGLE-FAMILY HOMES

The chart below shows the median purchase price and the median monthly rental price for years 2000 through 2018 for Maricopa County. The median purchase price has increased seven consecutive years while the median monthly rental price has increased five consecutive years since 2013. The monthly median purchase price and rental price in May 2018 were the highest they have ever been at $294,000 and $1,595, respectively.

The demand to either own or rent a single-family home is due to a growing population, more jobs, and higher wage earnings, while supply has not kept up. New home building is making a comeback, but for years its growth was stunted because of the real estate recession.

WHICH IS GOING UP FASTER: PURCHASE PRICE OR RENTAL PRICE?

Table 1 shows the median year-over-year changes by month for both purchase and rental prices for the first five months of 2017 and 2018. Purchase prices have increased between eight and ten percent while rental prices are up between four and seven percent.

When comparing January 2018 to May 2018, we find the purchase price up $21,000, or eight percent, and the rental price up $160 per month, or 11 percent. Of course, if I owned my home, my appreciation since the beginning of the year would be up around $21,000. If I rented, I would not have asset appreciation — just a rent increase.

Table 1. Median Purchase and Rental Price Year-Over-Year Changes by Month, Jan. to May 2017 & 2018

COMPARING A MORTGAGE PAYMENT TO A RENTAL PAYMENT

Table 2 features scenarios comparing a monthly mortgage payment to a monthly rental payment. Monthly mortgage payments were estimated using the May 2018 median purchase price of $294,000 with five different down payment amounts and two types of conventional loans. The May 2018 median rental payment of $1,595 is the number to which these monthly mortgage payments are compared.

The two loan types are a 30-year fixed with an interest rate of 4.66% and a 5/1 adjustable-rate mortgage (ARM) with an interest rate of 3.87%. Both rates were quoted on Freddie Mac’s website on May 24. A 5/1 ARM is a loan with a fixed rate for the first five years. In the sixth year, the rate may adjust higher and may increase every year thereafter. For each mortgage payment category, in addition to principal and interest, I added mortgage insurance for loans with down payments of less than 20 percent. I also added monthly payments of $100 for property taxes and $50 for homeowner’s insurance to every payment category. These are only estimates.

Table 2. Sales and Median Sale Price, April 2017 vs. April 2018

Of course, there are many factors to consider when it comes to deciding whether to own or rent. When owning, you may have a monthly HOA fee. Renters have to pay a monthly rental tax of one to three percent (depending on the city) on their rental price and should pay for renter’s insurance. How long do you plan on staying in the home? What is the probability of a job relocation? What kind of home repairs may be needed if you own? Also, consider the equity you stand to gain if you own, but won’t if you rent.

WHY RENT WHEN YOU CAN OWN — BUT WHAT IF I CANNOT FIND ANYTHING TO OWN?

Why pay rent when you can own? and Why pay your landlord’s mortgage? have been popular lines of ad copy for years now, but they seem to overlook the challenge of locking down a purchase in today’s competitive single-family home market. My advice to buyers: do not give up. Be prepared and persevere. Get loan pre-approval through a lender for a house in your price range. Pick an area you would like to live in and learn everything you can about it. Meet with a real estate agent and get trend information on inventory, days on market, sales, and prices. And when a home that meets your needs hits the market, don’t wait — write the offer! Contact me if you need a recommendation for a real estate agent or a lender. Whatever you do, don’t give up on owning!