Buy or rent firstIs it a good idea for newcomers to Silicon Valley to rent for a year, or smarter for them to purchase right away? There are many factors to consider, and even more if you are coming from another state or country.

Normally, I would suggest deciding where you want to live generally (example, Almaden area of San Jose 95120) and renting there for a bit first just to make sure it’s where you want to be. This is especially true if you have children who will be in public schools, as it can be rough on them if they change again once you’ve been here for awhile. Renting first enables you to learn the area and takes some pressure off. Also, it can take some time to move money from overseas for your down payment, so the little extra time can help there, too.

However, many people want to buy immediately and will make several trips here before the move to find and purchase a home. Often this is because they see the value in owning (tax benefits, getting kids into certain schools). I’ve had many people tell me that it helps them to establish themselves in their new community faster if they buy rather than rent.

The current market remains an impacted, strong seller’s market which has refused to let up over the last few years. With home prices trending on a seemingly endless climb, some buyers are clamoring to purchase before prices rise higher. Other potential buyers sometimes try to rent with the plan to sit out the storm until the market has cooled, but high demand has raised rental costs as well, and there’s no knowing how long it will take for the market to correct, or if it will ever correct below the current trend. For this reason, trying to wait-out the market involves a huge risk.

Back in 2013, when I originally published this post, there was a lot of focus on mortgage interest rates, which were very favorable at the time, hovering between 4.125 and 4.25%. Since most buyers use mortgage loans, the interest rate can be a big factor in budgeting the purchase. To understand the impact, let’s compare the 2013 numbers with the predicted rise that was given for 2014 to 5.4% interest.

What does this rise in interest rates mean in terms of housing affordability?

$500,000 mortgage, 30 year fixed at 4.25% = monthly payment of $2459

$500,000 mortgage, 30 year fixed at 5.4% = monthly payment of $2807

Difference = $348, or a 14% increase in the monthly payment

Or, let’s look at it in terms of buying power.

$2500 mortgage payment, 30 year term at 4.25% = loan amount of $508,192

$2500 mortgage payment, 30 year term at 5.4% = loan amount of $445,211

To summarize, a rise of interest from 4.25% to 5.4% cuts into the buying power of a $2,500 payment to the tune of almost $63,000.

For most people, the cost of waiting is a significant factor in this buy vs rent decision. My concern is that many people who elect to lease or rent for a year do not understand the risk that may accompany waiting. For most folks relocating to the San Jose or Peninsula area, the hardest thing to manage is the cost of housing. This could become substantially worse by putting off the purchase for a year, so right now I cannot recommend doing that.

Want more info? ¬†Please see my Valley of Heart’s Delight blog, with the related article
How will rising interest rates impact your home buying power?