Mortgage News

In a tough housing market, is it better to rent than buy?

About four in five people in the United States believe owning a home is a benchmark of achieving the “American dream,” according to Bankrate’s recent Home Affordability report.

But is it the right move in a difficult housing market? The median price of a home in the U.S. is about $420,000. Rates for a 30-year fixed mortgage are hovering between 6.5-7%. And there remains low inventory of homes, particularly affordable starter homes, so the competition for what is available tends to drive sales prices higher even when high mortgage rates should be expected to soften demand.

Given this backdrop, are many Americans better off renting than buying right now?

“(F)or people who don’t yet own a home and are trying to make a decision, the economics of renting have not looked this good in a long time,” New York Times real estate reporter David Leonhardt recently told PBS News Hour. “And I think — I understand why people have so long been down on renting. There’s even been some shame associated with renting … for most people right now, who are trying to figure out whether to buy or rent, renting is the smarter option financially. You will save money.”

Bankrate’s analysis of buying versus renting found that renting is more affordable in the 50 largest metro areas in the country. The typical home costs about 37% more to buy than to rent on a monthly basis.

Rent growth has slowed in the U.S. over the last two years, in part because there’s been a historic influx of new rental properties completed. As the cost of owning a home rises, the threat of sharply increasing rent has dimmed for the time being. It has created a better opportunity for people to save toward their goal of owning a home in the future.

Finances aren’t the only consideration when weighing whether to buy or rent. Growing families are often in search of space to live comfortably and invest in a long-term asset. Lifestyle is a clear motivator for home ownership that has to be balanced against financial wisdom and the timing of changing a living situation.

Leonhardt cautioned against the belief that “throwing money away” only applies to renting. The same can be true for owning a home, and there are opportunity costs for investing money elsewhere by sinking large sums of money into purchasing and maintaining a home.

“You have to do repairs when you own a home, often repairs that don’t really add to the value of the house,” Leonhardt said. “Like, if your roof is leaky and you have to fix it, you have no choice but to do that. That’s not a renovated kitchen. It’s just throwing money away to keep you where you are.”

One of Leonhardt’s insightful takeaways about this debate is that — more than in most financial areas of life — there are significant psychological factors that play into choosing how to invest in housing. It plays out in determining the prices people pay for homes and what sellers are willing to take to feel they have gotten the most out of the market.

The New York Times this week published a useful tool to help people calculate the costs of renting versus buying. It’s one of many resources that can be helpful in navigating a challenging market and planning the best path forward taking all goals into account.

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