When it comes to homeownership, one size does not fit all. There are markets that have comparably higher rents that favor homeownership. Some markets are highly expensive to own a home versus renting. There are other markets that are both expensive in which to own or rent.
Homeownership is not the best decision for all. For those that know for certain they will be there less than three years, typical transaction costs may trump the potential savings from lower payments and corresponding tax benefits among homeowners. Not all renters have the necessary down payment to become homeowners – even at the minimal levels available today for many entry level candidates. Many prospective homebuyers cannot qualify given mortgage underwriting either because of:
- Poor credit score
- Too much existing debt
- A mortgage foreclosure within the past seven years
What markets are the best potential homeownership markets (characterized by a greater percentage of renters with incomes that qualify them to become homeowners)? And where are the most challenging markets for renters to become homeowners?
The National Association of Realtors® (NAR) analyzed most of the 100 largest Metropolitan Statistical Areas (MSAs) regarding the percentage of renters that have the necessary income to become homeowners. NAR looked at the percentage of renters that had the necessary income in 2015 to buy the median priced home at that time.
Assumptions included in their calculations:
- Renters have the Income necessary to qualify for the median priced home in that market
- A 3 percent down mortgage loan
- Includes the upfront 1.75 percent mortgage insurance payment and the 0.85 percent per year annual recurring expense based on the remaining mortgage balance
- Individuals could qualify in regards to credit scores and existing debt levels
- Not restricted by a mortgage foreclosure in the prior seven years
So what major metros have the greatest percentage of renters that could potentially become homeowners today based on NAR’s methodology? Note that no Pacific Northwest, West Coast or Southwest markets made this most affordable list. Four of the metros, however, had more than twice the percentage of current renters that could become homeowners as does the U.S., on average.
What markets are the most challenging for current renters to become homeowners? Eight of the 10 most challenging markets are either in the Pacific Northwest or West Coast – with Hawaii located at the far west having the smallest percentage of current renters that could become homeowners — just 3.5 percent.
To read the entire NAR article and view the complete list of cities in the study click http://www.realtor.org/news-releases/2016/08/nar-identifies-top-markets-where-renters-can-afford-to-buy
Kudos to NAR for taking this look at the potential of homeownership. Given almost record low interest rates today, many renters need to take a serious look at buying a home.