Study: It's a good time to buy, but renting is a better value

While the abundant supply of homes in the region has caused prices to fall and encouraged some prospective buyers to wade into a market amid its biggest downturn in a decade, a study by an Old Dominion University economist found that, for many, renting may still be a better value.

The median monthly rental price of a three-bedroom house in Hampton Roads is forecast to be $1,287 this year, while the median monthly mortgage payment on a comparable house is $1,441, a premium of about 12 percent, according to the ODU study.

The comparison does not take into account annual property taxes or federal income tax breaks for home ownership, both of which would affect the model's conclusion. Real estate agents argue that including those would make up the difference between renting and buying.

Gilbert Yochum, an economist at the university, said the model was constructed so economists could monitor the baseline measure of what families pay for housing on a month-to-month basis.

"Before the price run-up in housing, it was very much in the interest of households to buy," Yochum said. "That was true all the way to 2003. Only then did you see the ratio climb so rapidly that by 2005 and 2006, the decision to own or rent was seriously moving back to the rent side."

In 2003, the median rent of a three-bedroom home in Hampton Roads was $1,044, while the median monthly mortgage payment was $809. Despite the continuing rise in rental prices during the following years, the prices of homes went up so dramatically that by 2006, the equation had flipped, with rent prices at $1,164 and mortgage payments of $1,457.

Greg Grootendorst, deputy director for economics of the Hampton Roads Planning District Commission, looked at the same figures and came to the same conclusion.

"Even though prices on rentals have increased and housing prices have gone down, those two lines have not crossed back yet," he said.

There are signs that could change, however.

Prices for existing homes fell 5.4 percent in September in South Hampton Roads, according to the region's local multiple listing service. The prices are down 2.8 percent from year-ago levels.

ODU economists have forecast that prices will drop at least 4 percent more before the end of the year. Theoretically, if median rental prices continue to rise as they have every year since 2000, the comparison between buying and renting could become even in the next couple of years.

Barbara Wolcott, president of Prudential Decker Realty, said it is impossible to discount the income tax deductions, which offset much of the difference in the prices.

"That drastically changes what it is you're actually paying at the end of the year," Wolcott said.

Not to mention, she said, for buyers who wait out the downturn, prices will eventually rebound.

"When you rent, at the end of five or 10 years, you have nothing," she said. "If you're buying, you've not only built equity in your home, but the home value will have also gone up."

Ron Pearson, a certified financial planner who runs Beach Financial Advisory Service in Virginia Beach, said that for some it could still make financial sense to buy if they know they'll be in the area for many years and have good job security.

Having that long-term commitment is essential to making the math work, Pearson said, because it takes years of mortgage payments to build equity in a home.

"It used to be, if you were going to be here a year, you could flip the house and make money on it," he said. "Realistically, that's not the case anymore."

Josh Brown, (757) 446-2318, josh.brown@pilotonline.com