Pay Rent or Pay a mortgage? You Might Be Suprised!

The U.S. government has pushed hard to make homeowners out of the one-third of Americans who still rent their homes. It introduced and later extended a tax credit for first-time homebuyers, and has kept federal interest rates at their lowest levels since the 1940s.
Market conditions are such that now is a particularly good time for some renters to take the hint.

In Portland, Ore., San Francisco, Minneapolis and Washington, D.C., the premium to buy — the spread between what you'd spend on renting and what you'd pay each month for a mortgage — is far narrower now than its 15-year average. And economists predict a significant home-price hike in five years. So upgrading will cost much less than usual, and homebuyers are likely to get a good return on their investment.

Note that buying isn't necessarily cheaper than renting in these metro areas. In fact, it often remains a more expensive proposition. But for those determined to own, that investment is a better one now than it normally is.

Take San Francisco. To own a house here has always required a hefty bump in monthly costs from renting; it's normally an incredible 296% more expensive to buy than lease a home, and the city's residents know this. That's why 42% of them stick to renting. Even though in the third quarter of 2009 the premium was still in the triple digits — 233% — it had shrunk by 63 percentage points from the above 15-year average. As with the other cities we've highlighted, you're not getting nearly as good a deal by renting as you might have just a few years ago.

"Rents are falling, but not nearly as rapidly as home prices," says Ron Witten, founder of Dallas-based Witten Advisors, an apartment market consulting firm. "Part of the reason is a shift away from homeownership toward renting," he says, in part because mortgages have become harder for many to obtain.