Zillow: Yes, owning a home beats renting but there are still challenges

Not that I am overly fond of Zillow, but this a good article and on-point nonetheless.

If you’re currently renting, it’s better to buy.

The catch?

The down payment.

It’s getting harder to save up that money, especially given the increasing rents.

Zillow: Yes, owning a home beats renting but there are still challenges, especially for first-time buyers, Millennials

Brena Swanson November 11, 2015 2:00PM

Is it a good time to buy a home?

There are plenty of articles out there telling potential homeowners that now is a great time to buy, because it is, but the decision to own isn’t that simple.

A new Zillow report puts hard numbers to the fact that while comparatively low monthly mortgage payments, coupled with increasingly expensive rents, continue to make homeownership a relative bargain to Millennials and other potential homebuyers, there is a catch.

The main issue comes when you factor in that not only do borrowers have to save for a down payment in order to get the best interest rate, but coming up with that money is getting increasingly difficult as rents and homes values continue to rise.

According to CoreLogic’s (CLGX) latest home price index, home prices nationwide, including distressed sales, increased by 6.4% in September 2015 compared with a year ago.

For starters, it is more affordable to buy than rent. Zillow compared a homebuyer making the national median income ($54,990) and purchasing the median-valued U.S. home ($182,500) during the third quarter could expect to pay around 15% of their income towards payments.

In reverse, if the same household chose to rent a typical home, it could expect to pay slightly more than 30% of its income towards median rent.

And this is even true for Millennials.

Trulia recently published a report adjusting its numbers specifically for Millennials. Usually, when Trulia crunches its home-buying numbers, it assumes a 30-year, fixed-rate mortgage with a 20% down payment for households moving every seven years.

But the problem with this model is that it doesn’t fit the situations that average Millennials face. Instead, Trulia said that it is typical for young households (ages 25-34) to move every five years and only be able afford up to a 10% down payment.

Using this information instead, Trulia found that it is still 23% cheaper for that younger generation to buy a home than rent nationally.

But from here, Zillow began to break down what encompasses a down payment and explained how it’s just not that simple.

On one hand, rising rents and fairly flat income growth are making it hard to save for a down payment in the first place.

“In other words, renters’ money that could be going into the piggy bank for a future down payment is instead going into landlords’ pockets,” Zillow stated.

Then, there is the option of a smaller down payment. However, Zillow added that this option often comes with higher interest rates and private mortgage insurance (for down payments less than 15%), which both conspire to raise monthly payments and consume a larger share of monthly income.

It’s important to note that “needing to put 20% down” is a common misconception when it comes to down payments. There are homeownership programs that allow buyers to save on the down payment and retain savings for home maintenance and improvements. Today’s programs include grants, first mortgages with below-market interest rates and annual tax credits.