WASHINGTON – June 7, 2010 – To rent or to buy? For millions of Americans, that is the question. The recent housing boom and subsequent bust seem to provide a clear answer – that given an affordable mortgage, we would all rather be buyers.

With the piercing clarity that is 20-20 hindsight, many people burned by the mortgage market may now think differently. After all, you can’t be foreclosed on if you don’t own in the first place. For them, renting has become not only the smart move, but also the sensible one.

“Many Americans are questioning if homeownership is an inherent element of their dream,” says Tara-Nicholle Nelson, real estate consumer advocate for real estate website Trulia.

Part of that dream is also based on economic common sense. Besides stability and status, owning a home can help build equity, improve credit ratings, and be a tax deduction. Given these benefits, the dream of homeownership is hard to give up. Much as sales of pickups and SUVs are rebounding, Americans seem to need only the slightest nudge to jump back into the housing market. In April, sales of existing homes rose 7.6 percent nationwide, according to the National Association of Realtors. For new homes, sales surged 14.8 percent, according to the National Association of Home Builders.

Measuring rents vs. sales prices

In some markets, however, people are better off renting. That’s because in these areas, the cost of buying a new home is still prohibitive, especially given tighter lending standards. To determine which urban areas are best for renters and which are best for buyers, Trulia surveyed the country’s 50 largest cities.

“We took current list prices of the average cost to rent or own a two-bedroom apartment, condo, or town home in a city and divided it by one year’s rents,” says Nelson. Trulia broke the data into three categories and scored each city on a price-to-rent ratio ranging from 1 up to more than 21. If the price-to-rent ratio is between 1 and 15 – that is, if the price to buy is only one to 15 times prevailing rents – it’s much less expensive to own than to rent. If the ratio is between 16 and 20, owning a home is more expensive but might still make financial sense, depending on the individual situation. If the ratio is higher than 21, the total costs of owning a home are much greater than the costs of renting.

With a price-to-rent ratio of 33, New York City is highest on the list. The average cost to rent a two-bedroom apartment was $3,537 and to buy a comparable unit was $1,383,612. The next highest city, Omaha, came in at 26, where the average cost to rent a two-bedroom was $870 and to buy was $275,844. At the opposite end of the spectrum, with a price-to-rent ratio of 8, is Minneapolis, where an average two-bedroom unit rented for $1,699 and sold for $153,843.

Of course, more expensive, high-end homes are on the market in Minneapolis, but “you can own a house [here] very easily for less than you pay for rent,” says Aaron Dickinson, a broker at Edina Realty in Plymouth, Minn.

Some rebounding sales prices

Dickinson says prices in many areas are still below peak levels and may have hit bottom – prices have been increasing the past four months after falling for more than 40 months, according to the Minneapolis Area Association of Realtors. One of the most dramatic changes came in North Minneapolis, where the median sale price in April jumped 171 percent year-on-year, to $64,000, he says. It is one of the city’s older neighborhoods, adjacent to downtown, with smaller homes targeted for first-time buyers. Dickinson adds that the area was hit badly by foreclosures, so the resurgence is relative.

Even in a city as expensive as New York, some argue now is the best time to buy. Neil Binder, principal of the Bellmarc Companies, says that for those who can afford to own, renting is not the better option. “Not with 5 percent interest rates. If we had a different market, and prices were higher, and interest rates were higher, it would be a different story.”

Don’t be shy about negotiating

For the millions of New Yorkers who can’t afford to buy, or choose not to, renting in the city offers other advantages. Many developers overbuilt during the boom; rather than be stuck with empty apartments, many have been willing to negotiate rent reductions and shorter leases. According to Miller Samuel, the average rental for two-bedroom units in Manhattan dropped 6.6 percent year-on-year in this year’s first quarter, although brokers expect overall rental prices to stabilize for the remainder of the year.

Of course, many considerations other than price are involved – many see the flexibility of renting as a major advantage. Beth Sievers, a sales representative at the New York brokerage Bellmarc Realty, says one client who recently sold his Midtown co-op decided to rent instead, in order to stay liquid while he started his own business. He also wanted to avoid the difficulties that come with being approved by a co-op board, she says.

Another consideration: Renting might also be a better option until the economy fully recovers.

“For most people, now is not a good time to buy, for lack of security in people’s jobs,” says Mike Colpitts, editor of real estate forecaster Housingpredictor.com. While most analysts believe the New York market will stabilize, depending on employment, Colpitts holds a contrarian view: He expects housing prices in Manhattan to deflate by 13.8 percent this year as more foreclosures enter the market and properties remain overpriced.

Jerry Weigand, a commodity broker, also recently switched to renting after selling his Upper East Side apartment. He now lives in a two-bedroom unit for $6,500 per month. A newlywed, he says he and his wife wanted to try a different neighborhood. Their decision to rent was driven more by the desire for a new experience than by economics. He says they will look to buy again in a few years.

“I do feel that prices have a little way to go down, but not by a lot,” Weigand says. “And I don’t think they will rise by a lot like they did a few years ago.”

Copyright © 2010 The McGraw-Hill Cos. All rights reserved, businessweek.com, Venessa Wong

The average rate for 30-year fixed loans sank to 4.69 percent, from 4.75 percent last week, mortgage company Freddie Mac said Thursday.

That's the lowest point since Freddie Mac began tracking rates in April 1971. The previous record of 4.71 percent was set in December. Rates for 15-year and five-year mortgages also hit lows.

Mortgage rates have fallen over the past two months as nervous investors have shifted money into the safety of Treasury bonds. The demand for Treasurys has caused Treasury yields to fall. And mortgage rates tend to track the yields on long-term Treasurys.

Yet the falling rates have yet to spark a homebuying boom – or energize the economy. New-home sales collapsed in May after homebuying tax credits expired. The economy also remains under pressure from high unemployment. And many people don't qualify under tightened lending rules.

"As long as prospective homebuyers are still concerned about their jobs and financial well-being, many will be reluctant to take the plunge, even though affordability has never been better," said Greg McBride, senior financial analyst with Bankrate.com.

Low rates throughout the economy also hurt one group of Americans: savers. Puny rates are especially hard on people living on fixed incomes who are earning next to nothing on their savings.

Lending activity remains sluggish. Mortgage application volume dipped 6 percent last week from a week earlier, according to the Mortgage Bankers Association. Refinancing activity fell 7 percent. And mortgage applications to buy homes slipped 1.2 percent.

Many Americans owe more on their mortgages than their homes are worth – often called "under water" – and can't refinance. The Obama administration has launched programs to help borrowers refinance if they owe up to 25 percent more than their home's value and have loans owned or guaranteed by mortgage giants Freddie Mac or Fannie Mae.

About 291,000 homeowners have participated as of March. Yet that's a small fraction of the nearly 15 million homeowners who are under water, according to Moody's Economy.com, and cannot refinance. In hard-hit areas in Nevada and Florida, for example, home prices have fallen 50 percent or more from their highs. Record-low rates can't rescue those homeowners.

"It's not the desire to refinance; it's the ability to refinance," Chris Brown, a loan officer with Trinity Mortgage Co. in Orlando, Fla. "A lot of the people who can already have."

Given the costs of refinancing, some mortgage experts say a refinancing can be worthwhile if you can shave at least 0.75 percentage point from an existing rate. Others suggest waiting until you can lower your rate by at least a point.

Despite some lenders' ads, refinancing is never free. A fee normally goes to the mortgage broker or lender. There are also fees for title insurance, a new appraisal, document processing and other charges. Often, mortgage brokers or lenders create the appearance of a "no fee" mortgage by adding the costs to a total loan amount or by charging a higher interest rate.

People considering refinancing should factor in such fees. They should also calculate how many months it would take to recover them. For those who expect to stay in their home for two years or less, the fees might outweigh the savings from a lower rate.

Freddie Mac collects mortgage rates on Monday through Wednesday of each week from lenders around the country. Rates often fluctuate, even within a given day.

Rates on 15-year fixed-rate mortgages fell to an average of 4.13 percent. That was the lowest on records dating to September 1991. It was down from 4.2 percent a week earlier.

Rates on five-year adjustable-rate mortgages averaged 3.84 percent, down from 3.89 percent a week earlier. That was also the lowest on Freddie Mac's records, which date back to January 2005 for such loans.

Average rates on one-year adjustable-rate mortgages fell to 3.77 percent from 3.82 percent. That was the lowest average since May 2004.

The rates do not include add-on fees known as points. One point is equal to 1 percent of the total loan amount.

The nationwide fee for loans in Freddie Mac's survey averaged 0.7 a point for 30-year, 5-year and 1-year loans. The average fee for 15-year loans was 0.6 of a point.

Copyright © 2010 The Associated Press, Alan Zibel, AP real estate writer. All rights reserved. This material may not be published, broadcast, rewritten or redistributed. 

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