NEW YORK (MainStreet) — Millennials — and many others too — have been postponing their first home purchase in favor of renting. While that often does make sense, the decision is worth a second look: Soaring rents can now make owning pay off.

In fact, data from Zillow, the mortgage and housing firm, is striking: A first-time homebuyer with median income spends just 15.3% of income on home payments, versus 29.9% that would go to rent. 

That 14.6-point margin is remarkably wide. In the last "normal" period, from 1985 to 1999, this class of buyers spent 22.1% on payments, compared with 24.9% on rent, a gap of only 2.8%. With a narrow gap, renting is an easy choice for those not likely to stay put for very long. 

"Despite rising home values, homeownership remains very accessible for buyers that can scrape together a down payment — even if that down payment is relatively modest," said Zillow Chief Economist Stan Humphries.

Low mortgage rates and below-peak prices have made home purchases affordable. Meanwhile, demand for rental housing has spiked because the recession and low wage growth have left many potential buyers unable to scape together a down payment. Others cannot get a mortgage under today's stringent lending standards. And others are gun shy after witnessed the housing collapse of the late 2000s. Higher demand, of course, drives rents up.

Unfortunately, high rents make it harder to buy a first home.

"It's very difficult to come up with a down payment when so much of your monthly paycheck — especially on an entry-level salary — is going to your landlord instead of into your savings," Humphries says. "Buying conditions are getting better every day, and in time the allure of fixed housing payments and building wealth through home equity will draw more buyers out of rentals and into homeownership."

Conditions vary among the nearly three dozen markets studied, according to the Zillow survey, but only three markets show owning to be more expensive than renting: San Jose, where it takes 43.7% of income to buy a first home, versus 37.9% to rent; Los Angeles, 50.7% versus 47.9%; San Diego, 42.9% compared with 42.5%.

At the other extreme are cities such as Tampa, Houston and Pittsburgh, where gaps of  around 15 percentage points favor owning.

A large difference between cost of owning versus renting makes it especially important to dig deeply into the numbers in deciding which to do. 

One rule of thumb says buying makes sense if one expects to remain in the home for at least four or five years. That's long enough for home appreciation, which averages around 3% a year, to offset title insurance, a Realtor commission and other costs of buying and selling. The homeowner who stays that long can break even

But under today's conditions, the cost of renting becomes a more important consideration in the decision. In fact, you could lose money on a house owned for just a few years but still come out ahead because owning was so much cheaper than renting. Use the Rent vs. Buy Calculator to juggle all the factors.

— By Jeff Brown for MainStreet

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