FORTUNE -- Home prices have been rising steadily for more than year, with the most recent Case-Shiller index reading showing the biggest year-over-year increase in nearly a decade. But that doesn't mean that it is a bad time to buy.
According to a just-published analysis from Trulia Chief Economist Jed Kolko, homeownership is 38% cheaper than renting nationally and in all of the 100 largest metro areas. His assumptions are fairly conservative:
Homes tend to appreciate at roughly 2% per year and the average homeowner stays in his home for roughly seven years. Of course, personal experiences can deviate markedly from the average, and Kolko looks at various home-price scenarios to see how that would change the rent or buy decision. If home prices don't appreciate at all over the next seven years, that would raise the average cost of homeownership from $1,180 per month to $1,470 to per month, but owning would still be cheaper than renting in most metropolitan areas.
Of course, if home prices fall over the next seven years, it would be cheaper to rent than buy in many cities. Kolko looked at 100 of the largest metro areas and studied what would happen if each of these cities experienced the worst seven-year home price appreciation periods in their history. The result? Even in the worst-case scenario, buying remains cheaper than renting in 37 cities, including Gary, Indiana; Detroit; Pittsburgh; and Kansas City.
But other metros pose riskier propositions. Here's Kolko:
The worst‐case scenario for Los Angeles is an annual price decline of 4.8%, which happened between 2006 Q1 and 2013 Q1. For a person today considering whether to buy or rent in Los Angeles, buying would be 63% more expensive than renting with annual price declines of 4.8%. That's a very different scenario than what we saw with our conservative baseline assumption, which makes buying 24% cheaper than renting.
A significant rise in interest rates in the coming months could also throw a wrench into Kolko's analysis. He calculates the "tipping point" at which renting becomes cheaper for individual metros. The metro closest to the tipping point is Honolulu, where mortgage interest rates rising to 5% could tip the scales in favor of renting. Other metro areas' tipping points:
If you're thinking about buying in any of these places, it may make sense to act now, lest rising interest rates make it uneconomical going forward.
Of course, buying remains cheaper than renting because many Americans are unable to qualify for mortgages or afford a down payment. And if you're in one of these camps, it makes little difference what metro you're looking to live in, as you'll be renting whether you like it or not.
But other data suggest that the real estate market is finally cooling off.Christopher Matthews - Feb 25, 2014 10:58 AM ET
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Mending the broken U.S. housing finance system won't be painless.
Costs on some mortgages will rise this fall as part of the Obama administration's proposal to reform housing finance, including the bailed-out mortgage investors Fannie Mae (FNMA) and Freddie Mac (FMCC). That could add to the pressure on house prices, which are already headed lower after last year's brief tax incentive-aided bounce.
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The country's economic engine seems to be running in reverse as more expensive borrowing spurs home sales, and an uptick in borrowing sends mortgage rates back down.
The recent surge in mortgage rates, by all rational calculations, should have made America's already troubled housing market worse off. Instead, higher borrowing costs modestly boosted homes sales in November.
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