Sometimes Buying Is Cheaper Than Renting

Ed and Blythe Tellefsen thought they’d never be able to afford a Southern California home. But thanks to low interest rates and the state’s nagging real estate slump, they recently purchased a three-bedroom house in La Crescenta.

Their mortgage payment is comparable to what they’d pay to rent the same house, Ed says. That proved a compelling argument to buy, even for longtime renters.

Similar scenes are being played out nationwide as depressed home prices and low interest rates combine to push mortgage payments down to levels that are at or below rental costs in many areas--a phenomenon not seen in recent memory, if ever, according to realtors.

Normally, when housing prices are soft and interest rates are low, rents also drop, which tends to keep rent payments below mortgage payments for comparable residences. However, that pattern reversed recently because the residential rental market has remained fairly tight, even while the housing market languished, realtors say.

Southern California’s earthquake, which destroyed or rendered unlivable thousands of rental units, tightened the rental market further. The result is that rents have remained steady or climbed.

Largely as a result of improving economics for buying compared to renting, first-time home buyers are flooding the market, realtors say. Nearly 4.5 million new homes sold nationwide in 1993--the best year for housing since 1979. Sales were particular strong in November and December, which historically are slow months for real estate. And agents say would-be buyers are still flocking to their seminars for first-time home buyers.

The reason boils down to dollars and cents.

“If you look through the computer listing for Orange County (home sales), you could pull up any number of properties where the mortgage rate would be less or equal to the rental rate in the same area,” says Pat Neal, a Garden Grove realtor and president of the California Assn. of Realtors in Los Angeles. “This is a tremendous window of opportunity for somebody to get into a home.”

Consider:

* Two Burbank townhomes were recently advertised--one for sale, the other for rent. Both are in security buildings and feature two bedrooms and 2 1/2 baths. The one for sale was listed at $154,000. Assuming the buyer put down 20% of that and secured a loan at 7% interest, the monthly payment would be about $980.

The advertised price for the rental was $1,050 a month--$70 a month more.

* In Clearwater, Fla., it costs roughly $800 a month to rent a three-bedroom apartment, brokers say. But you could buy a comparable three-bedroom house for $100,000, or $650 a month, saving $150 a month.

* In Denver, a three-bedroom home costs $115,000--about $740 a month--which is just slightly less than the $750 average rental rate for a comparable residence, says Barry Miller, president of Buyer’s Resource, a franchised real estate service for buyers.

Home buyers also receive substantial tax benefits that renters don’t get because mortgage interest and property taxes are deductible.

To illustrate how that plays out, let’s assume the buyers of the Burbank townhome are a husband and wife who earn $50,000 annually, pay $1,500 in state taxes, $1,500 in property taxes and give $1,000 annually to charity.

Because they’re buying a house, they’ll itemize tax deductions for the first time. In the end, they save about $1,500 in federal income tax and about $400 in state income taxes.

Between the tax savings and the lower housing costs, they have $227 a month more than the renters. However, the renters have $30,800 more in the bank--the amount of the buyers’ down payment.

If the renters paid the same rent for the next 30 years and kept that $30,000 invested, earning 10% a year, they would have $603,763 saved at the end of the period.

If the buyers invested their $227 monthly savings in a mutual fund earning 10% a year, they would own their home and still have an investment portfolio worth $508,772.

If the home’s value did not increase at all over the next 30 years, the buyers would still end up with total assets worth $662,772--some $59,000 more than the renters. If their home appreciated at a modest 2% average annual rate, they would end up $185,000 richer than the renters.

Of course, the numbers don’t always pencil out so neatly. Some realtors maintain that the buy-versus-rent equation works in favor of buyers when they purchase modest homes.

But the grander the residence, the less likely it is that a mortgage would be cheaper.

Also, the rental market is soft in some communities where there has been adequate building and modest population growth. For example, in Beverly, Mass.--a Boston suburb--it costs roughly $750 a month to rent a three-bedroom home, while it costs about $130,000--roughly $835 a month--to buy, Miller says.

With tax benefits, the buyers still may have a slight edge, using the same assumptions as before. But the house would have to appreciate by 3.5% or more annually before the buyers would come out ahead in the long run.

Nonetheless, if you’re renting a fairly sizable apartment or house, you ought to start crunching the numbers, realtors say. There’s a good chance you’d be better off with a mortgage.