By: David Lee Matthews December 27, 2012
2012 may be remembered as the year home prices started rising again, but owning remains significantly cheaper than renting in the Chicago area.
The cost of renting was about 31 percent higher than the average monthly mortgage payment here in the third quarter, according to a report by Deutsche Bank A.G. That disparity, which factors in property taxes, insurance, and other homeowner costs, was greater in Chicago than in all but seven U.S. metropolitan areas tracked by the German bank.
The ratio has flipped over the past five years, as home prices and interest rates have plunged and apartment rents have jumped. Before the bubble burst in 2006, the cost of renting here equaled 58.5 percent of the cost of owning — its lowest point — but rose sharply in the ensuing years, peaking at 148.9 percent in first-quarter 2012, according to Deutsche Bank. Put another way, the cost of renting vs. owning is now more than double what it was before the crash.
The spread reflects the record-high rents landlords are charging in the wake of the housing bust. Though low interest rates and still-depressed prices have fueled a recent rebound in the residential market, some would-be homebuyers are still unwilling to take the plunge.
“Everybody feels if they buy a place, they need to stay there a long time,” said Prudential Rubloff Properties broker Jeff Lowe. “When somebody tells you they're renting for awhile, some of their friends might actually be jealous.”
The S&P/Case-Shiller index of Chicago-area single-family home prices bounced back earlier this year but fell 1.5 percent from September to October, its second straight monthly decline. The index, however, was still up 4.3 percent for the year.
Just seven metro areas — Atlanta; Orlando, Fla.; Cleveland, Tampa, Fla.; Jacksonville, Fla.; Rochester, N.Y., and Las Vegas — posted higher rent-buy ratios in the quarter, according to the Deutsche Bank report. The national average was 107.8 percent.
“Not surprisingly, regional rent-buy results continue to highlight a bifurcation between core gateway markets in the Northeast and California, where renting oftentimes remains the cheaper option, and markets where housing has been hardest hit, namely Florida and the Midwest,” the Deutsche report said.
Owning could remain the less expensive option in the Chicago area for a while longer, based on another Deutsche Bank report forecasting that prices here will fall another 2.9 percent by next June, and 8.6 percent by June 2015. Chicago's three-year outlook is third-worst among other cities in the report, trailing only Las Vegas (-13.1 percent) and Sacramento, Calif. (-9.5 percent). Deutsche expects home prices across the nation to rise 6.3 percent over the next three years.
Yet apartment landlords soon may have a harder time hiking rents, especially downtown, where developers will complete nearly 4,700 apartments over the next two years. They will lose some tenants whatever they do, Mr. Lowe said.
“People don't want to rent forever,” he said. “Even if (rents) start increasing consistently 1 or 2 percent, I think financially people will be comfortable buying again.”
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