Santa Cruz sits perched upon the northern edge of Monterey Bay, quickly gaining notice as an up-and-coming seaside city regaled for its mild weather and loved for its famous Santa Cruz Beach Boardwalk and Wharf.
There’s locally sourced cuisine, stellar craft beer and Napa wine, and plenty of nightlife to fill your evenings after sunny days spent biking around downtown and surfing at the beach. It’s emerged in recent years as a real research and technology hub with University of California at Santa Cruz bringing top talents to the area.
With over 275,000 residents in this surf city, the area is unique enough to have a 5.2 percent population growth since 2010.
With all this growth, newcomers are presented with the age-old question: to rent or to buy?
Let’s take a look how the Santa Cruz market has fared in the final gasps of 2018 before 2019 ushers in its new tax codes and prerequisites.
Renting for the Short-Term
Buying a home can be an extremely beneficial investment, but it’s not for everyone. It requires time and money that not everyone has readily available. It may take years of saving before a home purchase may be an option.
The decision to rent or buy a home in Santa Cruz is largely based on lifestyle. Renting is simply a more feasible option for those who relocate frequently, have lackluster credit, or just do not have the savings needed to purchase a home. In Santa Cruz, CA, rental prices are some of the highest in the country with an average one-bedroom apartment renting for $1,891.
Daren Blomquist, Senior V.P. of Attom Data Solutions, agrees. “Home prices have become so high so quickly in the Bay Area that renting has become a better option.”
Let’s examine the numbers.
Zillow Home Value Index for all homes in Santa Cruz, CA: $921,700
Zillow Rent Index for all homes in Santa Cruz, CA: $3,275
Breakeven horizon: 3.6
Zillow’s records through September 2018 demonstrate the current health of the Santa Cruz real estate market for both renters and homebuyers. We’ve all been told that buying is more advantageous than renting, but at what point exactly does that investment begin to pay off? That’s what Zillow’s breakeven score is about.
Based on the figures above, it would take you 3.6 years of renting in order to break even with the initial costs of home buying.
With the average home price at $921,700, an average 20 percent down payment would equate to about $184,340, which would be due at time of sale. That is almost $200,000 before you’re in the door, while a renter would only need an average of $3,275, plus any minor deposits and application fees.
When you compare almost $40,000 in annual rent to the near $200K to purchase, the answer is clear – it is more economical to rent in the area if you are unable to commit to a long-term purchase.
However, Chief Economist of Realtor.com, Jonathan Smoke, warned in this spring’s Opportunity Cost Report that rental prices are expected to rise over the next several years.
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Buying for The Long Haul
There’s no doubt that home ownership offers more advantages in the long-run. A mortgage creates equity, which in turn offers you added leverage and security.
Home ownership can reap excellent rewards, but it’s a long game and doesn’t generally suit those unwilling or unable to settle. And with the changes in the tax laws, you can keep the appreciation money tax-free as long as you remain in the residence for just two years.
Hidden Costs in Buying a Home
Homeownership comes with many more costs than a simple rental agreement. There’s insurance, tax, and maintenance. These all add up, so it’s important to consider these items when considering a home purchase.
Many new homebuyers are prepared for the down payment and agent commission, but there are many other fees and costs that are less well-known. Most lenders will allow most of the costs to be bundled into the total loan amount.
Below, we explore the many additional closing costs that accompany home ownership.
- Closing Costs: Your lender and their third parties (lawyers, escrow, etc.) will typically access an additional 2% to 5% of the purchase price to cover their fees. This is due at the time of purchase with your down payment.
- Titling Fees: This varies from sale to sale, but most often these fees are split between the seller and the buyer.
- Record Fees: Assessed by the government to cover the costs of record updates.
- Survey, Appraisal, and Inspection Fees: Requirements vary per lender but may be required in order to confirm property description and value is equivalent to the loan amount. Paid by the buyer.
- Mortgage Application Fee: Due prior to closing and paid by buyer.
- Points: At 1% each, points allow buyers to reduce the total interest rate on their loan.
- Underwriting Fees: Buyer reimburses the lender for costs involved with the loan qualification process.
- Property Tax: Buyer usually pays six months of county taxes in advance during closing.
Smoke estimates these totaling around 8% of the purchase price.
Now you own your home. What other fees can you expect from being a new homeowner?
- HOA Fees: HOA fees range from $200-$500 a month, these cover community maintenance and amenities.
- Mortgage Interest: A 20 percent down payment will waive this fee, but if not, a new GOP tax plan could make mortgage interest tax deductible soon.
- California Housing Finance Agency: Issues credits to qualified homebuyers to reduce their overall federal tax.
- Property Taxes
- Homeowner’s Insurance
These fees vary from city to county to state, and to the economic business cycle.
Is Renting or Buying the Decision For You?
Renting is far easier. Purchasing a home, as demonstrated here, requires far more time and effort than simply signing a lease and paying a deposit. However, buying is well worth the headaches for those looking to settle into a long-term residence.
Santa Cruz is a fantastic investment these days with Zillow reporting that “Santa Cruz homes increased in price by 8 percent over the last year, and they are projected for another 5.1 percent increase in 2019.”
The overall decision is in your hands. As a potential renter or buyer, you need to ask where you see yourself living in the next 3.6 years. Also, the economy and job market can still be unpredictable, along with the rising cost of living. If you are unsure of your future, as many millennials are, it is appropriate to rent. What we are sure of is that the housing market is not slowing down any time soon.
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