Should you rent or buy a home? Prices are surging in both cases, which makes it complicated
Home prices are rising faster than rents, which is shrinking the affordability gap between being a homeowner and a tenant.
Median-priced, single-family homes are less affordable in just over three quarters of the nation — the highest total in 13 years, according to ATTOM, a real estate data tracker. That’s up from 39% at the end of 2020.
Rents are also up, especially for single-family homes, which have been in high demand during the pandemic. Single-family rents increased 10.9% in October 2021 compared to the year-earlier period, a sixth consecutive record high, according to CoreLogic. The fall is typically a slow season for housing.
So which is more affordable, owning or renting?
The answer is owning, but the gap in affordability is shrinking fast. Owning the median-priced home is more affordable than the average rent on a three-bedroom home in 58% of the nation, according to ATTOM, which factored in all the expenses of owning, including the monthly mortgage payment, property taxes and homeowners insurance.
Much of this affordability is due to the historically low mortgage rates of the past few years. Rates are now beginning to rise, however, and are up more than half a percentage point from the year-earlier period, according to Mortgage News Daily.
“The trend is slowly shifting toward renters, which could be a major force in easing price increases in 2022,” said Todd Teta, chief product officer with ATTOM. “Prices can only go up by so much more before renting becomes financially easier.”
“For now, though, rising wages and interest rates around 3% are enough to offset recent price runups and keep ownership on the plus side of the affordability ledger compared to renting.”
All real estate is local, however. Homeownership is more affordable than renting in suburban and rural areas, but it’s cheaper to rent in big cities.
That’s the case in Los Angeles, Chicago, Phoenix and San Diego. But owning a home is more affordable in Houston, San Antonio, Detroit, Philadelphia and Tampa, Fla.
The ATTOM report weighs affordability, not whether owning or renting is the better financial choice. Homeownership historically builds wealth, but some argue it could be more lucrative to take the down payment on a home and put it in the stock market or another higher yielding investment. That calculation generally depends on how long you intend to own the home. The longer you own, the better returns you will see.
The trouble now for potential buyers, especially first-timers, is it’s becoming increasingly difficult to save for a down payment.
“For buyers still reeling from last year’s overheated market and sky-high prices, fast-paced inflation is squeezing their budgets, and offsetting low mortgage rates,” said George Ratiu, manager of econmic research at Realtor.com.