RENT versus OWN ANALYSIS

With historically low interest rates, homeownership has risen steadily in the last decade. Homeownership is at an all time high of 68% versus a twenty year average of 65%. The issue of home affordability varies greatly across the United States. To this end we can attempt to quantify home affordability in the subject property market and compare it to rental rates.

To determine the housing choice ratio the first step is to examine median home values, median income values, and rents in the metropolitan Harrisburg market. Median mortgages can be quantified and added to property taxes and insurance as well as the tax benefit homeowners derive from interest and property tax deductions. Home affordability can be gauged by calculating qualifying lending ratios and median income levels and median mortgage payments.

The rent vs. own ratio of monthly mortgage payments to apartment rent payments in the market is based on a value of “1”. A value of “1” means the cost of the mortgage equals the cost of the monthly rent. In a national study by LaSalle Investment Management[1] found that the five markets where the gap between rents and median mortgage payments is the widest are as follows: Orange County, CA; Newark, NJ; San Jose, CA; San Francisco, CA; and Middlesex, NJ. The five markets where rents most closely approximate median mortgage payments are: Philadelphia, PA; Atlanta, GA; Houston, TX; Dallas, TX; and Minneapolis, MN.

The median housing value in the Harrisburg MSA is $138,000. The current residential 30 year mortgages are readily available for interest rates of six percent (6.0%). Typical financing for first-time homeowners and/or entry-level mortgages involves an equity requirement of three to five percent, for the purpose of this analysis I will choice equity of 4% and financing of 96%. The mortgage debt service on financing $132,480 over a thirty year amortization at six percent is equal to $790.33 per month. In the subject market real estate taxes are based on market value of the real property. Using a market value of $138,000 and a typical millage rate in the market area of 21 mils, the annual real estate taxes (county, municipal, school and library) are $2,901 or $241.75 per month. The annual insurance cost for a $138,000 residential owner-occupied property is $600.00 or $50.00 per month. The total monthly housing cost (Principle, Interest, Taxes and Insurance) are $1,082. Most American homeowners qualify for deduction of principle, real estate taxes and insurance. Using an amortization schedule the homeowner can expect to pay an average of $7,900 in principle each year in addition to the taxes and insurance. Using the annual taxes of $2,901 and the annual insurance of $600 the annual amount that may be deducted for household expenses is $11,401. Using a combined tax rate of 25%, the net tax savings benefit to the homeowner is $2,850 annually or $237 per month. As a result the net housing expense for the median homeowner is $845 per month.
[1] Home Ownership and the Impact on Apartment Demand, by Todd A. Canter and Ben Lentz 2002.