Buy or Rent? 

 A very popular option, especially in Hawaii, has been renting your home rather than buying. By now we are all aware that here in Hawaii home prices are higher than most other states especially in the mainland.  The question that taunts many buyers today is “should I buy or continue to rent”.  To preface, situations are entirely situational and there is no right or wrong clean-cut answer to this question.  It is with that in mind that this week's blog has the intention of arming and informing you with some facts and statistics that you may find make it easier to answer this question yourself.

  • “While less volatile than home prices, the median rent in the state has grown steadily. Official American Community Survey data from 2021 estimates the median monthly rent in the state to be $1,755, the highest of any state in the nation.”

First off, let us break down the first portion of this statement: “while less volatile than home prices, the median rent in the state has grown steadily.”  As we talked about in last week's blog, if you were to look at Hawaii counties housing market prices as if they were stock trends over the last 30 years, you would invest yesterday! This is not always the case for buyers however, why is this?  While housing prices have risen, so too has the cost of renting. The rates at which these have risen are not equal, with the price of homes growing at a rate that is  a touch higher than the price of renting at this current time. The rates have risen at a very similar pace,  especially if the pandemic market effects  were out of the pricing equation.  Another factor to consider is the current status of interest rates.  Interest rates can play a huge role in a buyer's decision to enter the market or not.  

Today a very common thought for most renters would be to question whether the money spent on rent would be better suited as a mortgage payment.  Here is a little exercise to show an example of how interest paid on a loan vs renting affects wealth: if the median rent is $1,755/month (number taken from above in the statistic), what would this amount qualify for as a monthly mortgage payment with the rates where they are currently (7.7% as of July 28th, 2023)?

Example Loan Specifications:

Down payment of 10%, 30 year fixed conventional loan, and a credit score of 700-719.

In this scenario an individual would qualify for a $250,000 loan! (given other loan application qualifications are met per the lender) This means that the same individual could find themselves in a home priced around $280,000 as soon as tomorrow while putting $1,797/ month towards the loan as  payment for the duration. (This is still subject to other loan specifications and types.)

While this home price may seem low in the current Hawaii County area, a property priced as such is a great place to start or build, and these properties are still out there in abundance.  Another key factor that is important to remember and understand is the amount of equity that is built up during the life of this loan.  For those of you unfamiliar with the term equity, here is a brief explanation.  Equity is the amount of money that goes towards the principal (the amount of money within the loan that goes directly to paying down the physical property at hand).  Home equity is what grows exponentially with time, see last week's blog for more info on the rising of home prices in Hawaii County. 

On the flip side of this coin, what equity lies within a property that an individual is renting? The simple answer is, none.  

To conclude, it is my opinion that if someone were short term living in a location (under 3 years), renting may be the best bet financially, given that housing prices and markets can rise and fall within that short of a period of time.  If you are planning on occupying a particular location for 8+ years however, I would strongly recommend looking at buying property.  Putting the money towards a down payment gives the individual a much better position to gain equity that grows exponentially over time. Then when you do find that it is time for you to change locations, that money has in turn worked FOR you rather than the other way around.