With both rent and homebuyer costs soaring to record highs, the eternal question of whether to rent or buy has never been tougher.
According to a report from Realtor.com on Thursday, renting is now cheaper than buying a starter home in three-quarters of the top 50 US cities — a stark change from a few months ago, when buying typically costs less.
Median rent hit a record high of $1,876 in June, up 14 percent from a year ago — but that still represented a monthly savings of $561 from the monthly cost of buying a first home, which jumped to $2,437, the report found.
As recently as January, buying a starter home was the cheaper long-run option than renting in more than half of US cities.
But mortgage rates have more than doubled since then, sharply increasing the monthly payments for homebuyers. At the same time, home prices have continued to climb, setting a new record last month, industry data show.
A map shows the top five cities with the biggest savings for renters versus buyers (yellow) and the five where homebuyers still save the most per month (magenta)
Median rent (red) and the annual change in rents (grey) are seen for the past three years. Rents have soared, but home prices have increased even faster, a new study shows
As a result, renting is now the relatively cheaper option for most urban dwellers, and the difference is starkest in big cities with high overall costs of living.
In San Francisco, median rent clocks in at $3,171, while the cost to buy a starter home averages $5,705 per month — a difference of $2,535 each month.
In New York, average renters save $2,092 every month from homebuyers, who face a monthly bill of $5,081 if they buy a home today.
Still, some cities remain where buying a home is the cheaper option. In Pittsburgh, where monthly payments for starter homes average $1,061, homebuyers save $522 per month versus renting.
In Birmingham, Alabama, homebuyers pay $377 less per month than renters, and the savings clock in at $284 monthly in St. Louis.
The handful of cities that still favored first-time buyers were typically located in the South and Midwest.
The study noted that none of those cities had median rents higher than the national average, but all had monthly purchase costs for starter homes well below the national average.
The annual change in starter home prices is seen going back two years. While the rate of price increases has slowed in recent months, they are still rising
Median home prices in May, and the change in price from a year ago, are seen for each region
Cities with the biggest monthly cost difference for renters and homebuyers
Cheaper to rent:
San Jose, CA
Cheaper to buy:
‘The rent-favoring cities are larger, more geographically distributed, and tend to be markets with higher concentrations of tech workers and high earners,’ the report said.
Average Manhattan rent hits record $5K
The average rental price in Manhattan hit another all-time high of $5,058 in June, according to brokerage firm Douglas Elliman.
Manhattan’s median rent, the mid-point value of the total sample, also hit a record $4,050 in June after reaching $4,000 for the first time in May.
The report from Elliman looked only at rents in Manhattan, while the Realtor.com study included the entire New York metro area.
‘Austin, where the monthly purchase cost is nearly double the monthly rent cost, leads the way in rent favorability.’
To be sure, there are intangible factors that impact the decision to rent or buy beyond the monthly costs.
Homebuyers build equity over time, and usually hope to sell their home for a profit down the line.
On the other hand, renters may not want to take on a mortgage, and may value the freedom from the maintenance and upkeep associated with owning a home.
The study calculated monthly prices for starter homes by focusing on listings for houses with 0 to 2 bedrooms, assuming a 7 percent down payment on the average rate for a 30-year mortgage and adding average taxes, fees and insurance costs.
Earlier this week, other industry data showed that prices for existing homes are at their highest level on record, even as demand for mortgages hit a 22-year low as interest rates soar.
The national median home price jumped 13.4 percent in June from a year earlier to $416,000, the highest on record, the National Association of Realtors said Wednesday.
That’s an all-time high according to data going back to 1999, NAR said. Despite the increase, home prices are not climbing as much as they were earlier this year.
Average 30 year fixed rate mortgages (blue) since 2000 are seen compared to the Federal Reserve’s benchmark interest rates (red)
The national median home price jumped 13.4 percent in June from a year earlier to $416,000, an all-time high on records dating back to 1999
The National Association of Realtors’ revealed that its housing-affordability index – a metric that uses median existing-home prices, median family incomes and average mortgage rates to calculate home affordability – fell to 102.5 last May, the lowest recorded since 2006
‘With each passing month it appears price appreciation is less strong than earlier months,’ said Lawrence Yun, NAR´s chief economist.
At the same time, the average contract rate for a 30-year fixed-rate mortgage hit 5.82 percent, roughly double the recent lows seen in January.
The Federal Reserve has been raising the benchmark interest rate to fight inflation, but the rising borrowing costs have quickly impacted the housing market.
Amid rising home prices and interest rates, mortgage demand fell 6 percent last week from the week before, according to a report from the Mortgage Bankers Association.
It marked the lowest level for mortgage applications since 2000, said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting.
Kan said that the key factors weighing on homebuyer demand are ‘the weakening economic outlook, high inflation, and persistent affordability challenges.’
‘The decline in recent purchase applications aligns with slower homebuilding activity due to reduced buyer traffic and ongoing building material shortages and higher costs,’ he added.