Rent or Buy? The Cost of Waiting

September 25, 2017

It’s happening. Interest rates are increasing.

All the 20-somethings who have great jobs are asking me: should we buy a house or keep renting? The answer isn’t so easy. The common wisdom for decades was to buy a house as soon as you can, because it’s a great investment. That “wisdom” turned some of our friends upside down on their mortgage in the past 10 years.

All signs point to a continually strong real estate market in 2017 & 2018 in the first time buyer price points in Atlanta Georgia. The broader economy is growing stronger in 2017. In July, the Federal Reserve increased interest rates for the second time this year. Most experts agree the Fed will continue to steadily raise interest rates over the next year on the heels of what is largely perceived as pro-business federal leadership.

So, when should you buy your first home? Realtor Karen Tabler with Catalyst Home Team gives her advice on how to navigate today’s Atlanta real estate market. We want to clear up some confusion and help you understand the facts about rising rates. After all, owning is 35% cheaper than renting.

Since 1975, housing has appreciated by an average of 4.5 percent per year. (Good data start in 1975.) With a 20 percent down payment, a price increase of just 4.5 percent turns into a 22.5 percent increase in the homeowner’s equity. (Do some arithmetic with a hypothetical $100,000 home to verify that result.) Real estate proponents call this the “cash-on-cash” return.

Most people thinking about buying compare monthly mortgage payments to rent, which is a good starting point. However, some of that monthly payment goes to principal. It’s like saving. To put buying on a level playing field with renting, we recommend you look at just the part of the monthly payment that will go to interest.

Myth: Interest rates don’t affect purchasing power.

As interest rates and home prices increase, your buying power decreases and could really cost you in the future. As rates increase just 1%, your buying power could go down by 10%. The cost of waiting just one year could negatively impact your effective buying power, significantly – as home prices go up 4% every six months, your buying power decreases by 8-11%.
The lower your interest rate, the higher your purchasing power. Because your purchasing power decreases as interest rates rise, that means today at 4% interest you can afford a $275,000 home today, but at 4.75% interest rate, you will only be able to afford a $225,000 home. If you are a move up buyer currently looking at a home priced at $575,000 today, at a 4.75% interest rate you’d only be able to afford roughly a $500,000 home.

Myth: Higher interest rates cause lower home prices because homebuyers can’t afford as much.

There’s no strong relationship between house prices and interest rates, according to Mark Palim, vice president for applied economic and housing research for Fannie Mae. Other factors (like a stronger economy) have a bigger impact on house prices than changes in mortgage rates.

Myth: Renting is cheaper than owning.

Homeownership remains, on average, 35% cheaper than renting in all of the 100 largest metros, according to a recent report released by Trulia (assuming a 20% down payment and 30 year mortgage.)


As rates rise and your maximum purchase price falls, you could find that you can’t afford the kind of home you wanted. You may have to delay your plans to buy a single family home (also known as a free standing home) and opt for a condo or townhome instead. While it’s not the end of the world and it is still a good investment, it can be disappointing to settle for less than a home that will really suit your needs. Or higher rates could force you to buy an older home that needs work. Remodeling fees can quickly add up to five figures even on small projects.

If you know you need to buy or are even thinking about it, the difference between acting now and acting later could be a difference of thousands of dollars a year before you know it.

Of course, many other factors come into play in the decision to buy a home, such as how long you plan to stay in your home, the stability of your job, how much money you’ve saved up for a down payment — and whether your landlord is planning to increase your rent (again!).


Dreaming of a home of your own? Text or email us today – we’ll connect you to one of our preferred lenders and see just how far your home buying dollars can go today!


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