The cost of buying a starter home was over 60 percent higher than renting.
Renting a home is now more affordable than buying one in 50 large metros across the United States, with elevated mortgage rates being a key reason affecting home affordability.
“In February 2024, the U.S. median rent continued to decline year-over-year for the seventh month in a row, down 0.4 percent for 0-2 bedroom properties across the top 50 metros,” according to a March 26
report from Realtor.com.
Renting was found to be “a more affordable option than buying in all of the 50 largest metros,” it said.
The monthly cost of purchasing a starter home in these metros was $1,027 more, or 60.1 percent higher, than renting one.
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In the top 10 metros that favor renting over buying, the average monthly payments for a starter home were $1,950 (95.6 percent) higher than rents—nearly double,” the report said.
The top rent-favoring metros were usually markets with “a higher concentration of tech workers and high earners, where both the average rent-cost and buy-cost are higher than the national average.”
The report cited elevated mortgage rates as a “key driver” that has made buying a home less affordable.
The Austin-Round Rock-Georgetown metro area in Texas topped the list of markets where renting was favorable, with the monthly cost of buying a starter home in the city $3,695 more, or 141 percent higher, than renting. This was followed by Seattle-Tacoma-Bellevue in Washington state, Phoenix-Mesa-Chandler in Arizona, and San Francisco-Oakland-Berkeley in California.
Five metros flipped from a buy-favoring market to a rent-favoring one in the past 12 months: Memphis, Tennessee; Birmingham, Alabama; Pittsburgh, Pennsylvania; St. Louis, Missouri; and Baltimore, Maryland.
The median asking rent for February in the 50 metros was $1,708, down by $4 from last month. Despite the seven months of continuous decline, the U.S. median rent was only $50 lower than the peak seen in August 2022.
The report comes amid a home affordability crisis in the country. A typical American household now earns $29,448 less than what it needs to purchase a median-priced home, according to real estate brokerage Redfin.
Prospective buyers required an annual income of $113,520 in February to afford a median-priced home worth $412,778. This annual income requirement is up 12 percent from a year earlier. Redin pointed out that home affordability is strained because housing costs rise “much faster” than people’s incomes.
Over the last year, the median household income has risen by 6 percent, only half as much as the income needed to afford a median-priced home, it stated.
“For over a decade, America has been slowly marching toward a housing affordability crisis due to chronic underbuilding, and that crisis was kicked into overdrive when the pandemic homebuying boom fueled a meteoric rise in housing prices,” said Redfin Senior Economist Elijah de la Campa.
“Now there’s another culprit squeezing homebuyers: elevated mortgage rates. We’re slowly climbing our way out of an affordability hole, but we have a long way to go. Rates have come down from their peak, and are expected to fall again by the end of the year, which should make homebuying a little more affordable and incentivize buyers to come off the sidelines,” he added.
Renting to Remain Cheaper
Not many experts see buying homes becoming cheaper than renting anytime soon. Thomas Ryan, a property economist at Capital Economics, pointed out in a March 25
postthat even though the difference in cost will drop as mortgage rates decline, “even by 2026, renting will remain by far the more cost-effective option.”
In a March 18
post, real estate services firm CBRE said it expects renting to remain less expensive than buying a home for “some time.”
Over the next five years, CBRE predicts multifamily rents will grow by 2.8 percent per year. The firm calculates that a combination of lower mortgage rates and falling home prices will bring the cost of home ownership closer to renting.
As long-term mortgage rates remain above pre-pandemic levels, many homeowners will continue to stick with their homes that were financed at lower rates years ago, which will tighten the home sales market and boost home prices, according to CBRE.
CBRE expects an estimated shortage of 3.8 million housing units to keep supporting home prices and the cost-to-buy premium.
To buy a starter home in the United States, a first-time
buyer now needs to make $76,000, according to Redfin. Before the COVID-19 pandemic, an individual making 80 percent of the median income could afford a typical home, which is now not the case.
Mr. Campa pointed out that the pandemic has “changed the definition of a starter home.” A decade ago, a small three-bedroom home was considered a starter home. But now, the same type of home can cost seven figures, especially in parts of the country where living costs are high.
“The most affordable homes are much smaller and often require a lot of work to make them habitable—which makes them cost even more. Today’s most affordable homes are still hard for the average American to afford, let alone the average first-time buyer who tends to put less money down in exchange for higher monthly payments,” he said.
