Numbers Count: Rent hikes projected to slow in 2016

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Numbers count. They matter to bankers and to prospective homebuyers, sellers, and real estate professionals. Here’s my take on the key numbers on the housing market this week.

view looking up at a high-rise apartment building with many of the windows lit up.The numbers: Rent appreciation will shrink over the next 12 months, slowing to an annual rate of 1.1% by December 2016, according to the new Zillow Rent Forecast released January 22.

Zillow is forecasting a decrease in the rate of rental appreciation amid what the company calls “a rental affordability crisis” that has renters in some markets spending almost half of their income on rent. Zillow forecasts rent in San Francisco will rise 5.9% in 2016, down from 12.5% in 2015.

Even with the slowdown, Zillow expects rents will remain unaffordable in many major markets, especially on the West Coast. Renters in San Francisco and Los Angeles may spend 40% of their income on a rental payment.

What counts: Buy-versus-rent is a constant debate, especially among millennials who are early in their careers, perhaps have not bought a first home yet, and may be weighing the pluses and minuses of both lifestyles. What seems clear is millennials do want to own at some point: 75% of millennials believe ownership is an important long-term goal, according to a survey by the Demand Institute.

A good place to start evaluating buy-versus-rent is by doing some rough math. There are numerous online calculators to help determine the relative advantages of buying or renting. Here are four to get you started:

What you’ll see is the decision depends on some common variables, no matter what calculator you use:

1) The size of your down payment. Keep in mind that while 20% has advantages, there are loans available to qualified borrowers with as little as 3% down.

2) How long you expect to live in one place. Generally, the advantage of buying increases the longer you intend to stay in a home because the upfront costs will be spread across a longer period.

3) The price of the home you might buy. This one is important since a more expensive house will typically require a larger cash down payment and potential larger monthly payments.

4) Mortgage rates, since higher interest rates generally equate to higher monthly payments. When rates are low, as they are now, owning a home and paying a mortgage may prove more cost-effective than paying rent.

Each calculator is different; it’s fun to play around with all of them and get a sense of the financial factors you may want to keep in mind when considering buying or renting in a particular market.

Keep in mind: If you buy, you may build equity in your home as you pay down your mortgage or if your home appreciates. And, there may be tax benefits to having a mortgage, but you should consult a tax professional to discuss your particular circumstances.

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