Renting is now cheaper than buying a starter home in most of the US

With the costs of renting and buying a home at record levels, the eternal question of whether to rent or buy has never been more difficult.

According to a report from Realtor.com on Thursday, renting is now cheaper than buying a starter home in three-quarters of the 50 largest US cities — a stark change from the past few months, when the cost of buying was lower.

Median rent hit a record high of $1,876 in June, up 14 percent from a year ago — but that still represents a monthly savings of $561 off the monthly cost of buying a first home, which jumped to $2,437, according to the report.

As recently as January, buying an entry-level home was the cheaper long-term option than renting in more than half of American cities.

But mortgage rates have more than doubled since then, leading to a sharp increase in monthly payments for homebuyers. Meanwhile, home prices continued to rise, setting a new record last month, according to industry data.

The map shows the top five cities with the most savings for renters versus buyers (in yellow) and the five where homebuyers still save more per month (purple)

Average rent (red) and annual change in rents (gray) are seen over the past three years.  A new study shows that rents are up, but home prices are rising faster

Average rent (red) and annual change in rents (gray) are seen over the past three years. A new study shows that rents are up, but home prices are rising faster

As a result, rent is now the relatively cheaper option for most city dwellers, and the difference is more pronounced in larger cities with total cost of living.

In San Francisco, the average hourly rent is $3,171, while the average cost to buy a beginner home is $5,705 per month — a difference of $2,535 each month.

In New York, the average renter saves $2,092 a month from homebuyers, who face a monthly bill of $5,081 if they buy a home today.

However, some cities remain where buying a home is the cheapest option. In Pittsburgh, where average monthly payments for start-up homes are $1,061, homebuyers save $522 a month on rent.

In Birmingham, Alabama, homebuyers pay $377 less per month than renters, and an hour saves $284 per month in St. Louis.

A handful of cities that still favored first-time buyers were usually located in the South and Midwest.

The study indicated that none of these cities averaged rents above the national average, but all had monthly purchase costs for starter homes well below the national average.

The annual change in start-up home prices is seen two years ago.  While the rate of price increases has slowed in recent months, it is still on the rise

The annual change in start-up home prices is seen two years ago. While the rate of price increases has slowed in recent months, it is still on the rise

Average house prices in May, change in price from last year, are seen for each region

Average house prices in May, change in price from last year, are seen for each region

Cities with the largest monthly cost difference for renters and homebuyers

Cheapest to rent:

Austin, Texas

San Francisco

Seattle

New York

San Jose, California

Portland, or

Los Angeles

Boston

Houston

Phoenix

Cheapest to buy:

Pittsburgh

Birmingham, AL

Saint Louis

Cleveland

Baltimore

Louisville, Kentucky

Virginia Beach

Indianapolis

Cincinnati

Kansas City

Source: Realtor.com

“Cities that prefer rents are larger and more geographically dispersed and tend to be markets with higher concentrations of tech workers and high-income earners,” the report said.

The average rent for Manhattan is $5,000

The median rental price in Manhattan hit an all-time high of $5,058 in June, according to brokerage Douglas Elliman.

Average rent in Manhattan, the median value of the total sample, hit a record $4,050 in June after hitting $4,000 for the first time in May.

The Elliman report only looked at rentals in Manhattan, while the Realtor.com study covered the entire New York metro area.

“Austin, where the monthly purchase cost is nearly twice that of the monthly rent, is leading the way in rent preference.”

To be sure, there are intangible factors that influence the decision to rent or buy beyond the monthly costs.

Home buyers build equity over time, usually hoping to sell their homes for a profit.

On the other hand, renters may not want to take out a mortgage, and may appreciate the freedom from upkeep and upkeep associated with owning a home.

The study calculated monthly prices for starter homes by focusing on listings of 0 to 2-bedroom homes, assuming a 7 percent down payment on the average 30-year mortgage rate and adding average taxes, fees and insurance costs.

Earlier this week, other industry data showed existing home prices at an all-time high, even as demand for mortgages fell to a 22-year low as interest rates rose.

The National Association of Realtors said Wednesday that the national median home price jumped 13.4 percent in June from a year earlier to $416,000, the highest price ever.

This is an all-time high according to data going back to 1999, NAR said. Despite the increase, home prices are not rising as much as they were earlier this year.

The average of 30-year fixed-rate mortgages (in blue) since 2000 is seen compared to the Federal Reserve's reference rates (in red)

The average of 30-year fixed-rate mortgages (in blue) since 2000 is seen compared to the Federal Reserve’s reference rates (in red)

The national median home price jumped 13.4 percent in June of the previous year to $416,000, the highest level ever in records dating back to 1999.

The national median home price jumped 13.4 percent in June of the previous year to $416,000, the highest level ever in records dating back to 1999.

The National Association of Realtors revealed that the housing affordability index - a measure that uses average existing home prices, median household income and average mortgage rates to calculate the affordability of a home - fell to 102.5 last May, the lowest level. Registered since 2006

The National Association of Realtors revealed that the housing affordability index – a measure that uses average existing home prices, median household income and average mortgage rates to calculate the affordability of a home – fell to 102.5 last May, the lowest level. Registered since 2006

“With each passing month, the price hike appears to be less robust than the previous months,” said Lawrence Yun, chief economist at NAR.

Meanwhile, the average contract rate for a 30-year fixed-interest mortgage was 5.82 percent, nearly double its recent lows in January.

The Federal Reserve was raising its benchmark interest rate to fight inflation, but rising borrowing costs quickly affected the housing market.

Amid rising home prices and interest rates, mortgage demand fell 6 percent last week compared to the previous week, according to a report from the Mortgage Bankers Association.

It represents the lowest level of mortgage applications since 2000, said Joel Kahn, associate vice president of economic and industry forecasting at the MBA.

Kan said the main factors affecting homebuyer demand are “weak economic outlook, rising inflation, and continuing challenges in affordability.”

“The drop in recent purchase orders is in line with the slowdown in home-building activity due to reduced traffic of buyers, an ongoing shortage of building materials and rising costs,” he added.

Leave a Reply

%d bloggers like this: