Buy or Rent a Home: Buying is Cheaper in 74% of the Largest U.S. Cities

With housing values falling and demand for rental properties on the rise, it’s now become cheaper to buy a home than to rent one in most major U.S. cities.

In July, buying was cheaper than renting in 74% of the nation’s 50 largest cities, according to real-estate (NYSE:IYR) website Trulia. Renting was cheaper in only 12% of cities, including Chicago, New York, Seattle and San Francisco. In the remaining 14% of cities, renting was slightly less expensive, but negligibly.

Investing Insights: Gold Haters: Contrarian Investing Gone Wrong.

Both declining home prices and low interest rates are making buying more affordable than ever. A 3o-year fixed mortgage had an average rate of just 4.19% as of Monday, while a 15-year fixed had an average of 3.43%. And of course, tax breaks for homeowners just sweeten the pot.

Daisy Kong, a spokeswoman for Trulia, says “It’s a personal decision, of course. But if you have a steady job and you are planning to stay for seven years or more and have enough cash to put 20 percent down and enough left over for seven or eight months of expenses, you’re better off buying in most places.”

Home prices (NYSE:IYR) are down 59% since their peak in August 2006. The average two-bedroom, two-bath condo now goes for around $60,000, only about six times the average annual rent for a similar rental, which is about $9,700. Many cities, including Detroit, Phoenix, Fresno, Las Vegas, and Sacramento, have buy-rent ratios of eight or less, meaning it would take eight years or less to pay in rent what one would pay to buy a similar property.

While New York remains the most expensive city for renters, it still makes more sense to rent a two-bedroom Manhattan apartment at an average of $2,980 a month rather than buy it for roughly $1.3 million at a buy-rent ratio of thirty six. The buy-rent ratio also falls in favor of renting in Fort Worth, TX because the relatively few rental properties in the city tend to be higher end and more costly. Renting also wins out in Omaha, Seattle, and Kansas City.

Check Out: Housing Starts and Building Permits Start Another Leg Down.

Of course, there are other factors to consider when weighing whether to buy or rent. Sometimes the transactional costs of buying and selling more than offset savings. And one’s length of stay also comes into play, with buying becoming incurring greater savings in the long run but often costing more for people staying in their homes less than seven years. Buying also means that one must come up with cash for closing, which often requires that buyers come up with 20% to put down on the house. And home owners must also be able to afford property taxes, insurance, heat, utilities, and regular maintenance, all of which have the potential to offset savings.

Despite potential savings, even after one accounts for added costs, fewer people are buying homes. With the future of the economy so uncertain, and many worried about whether they will be able to afford in the future what they can now, people are wary of taking risks and committing themselves to something as burdensome as a mortgage. Should one’s income suddenly take a hit, it would be much easier to downgrade rental properties than to sell one’s home.