It’s Cheaper to Rent Than Buy a House in America Right Now

It is likely to cost you less a month to rent a home in America right now than buying one, realtor.com chief economist Danielle Hale said, as mortgage rates, which have soared to their highest level since the turn of the century, have made owning property beyond the reach of most Americans.

The median rent in America’s 50 largest metropolitan areas costs about $1750, which is down nearly $30 from a year ago, according to new data from realtor.com, and it was the fifth such consecutive drop for up to two-bedroom homes. The rental market is seeing a softening partly due to more supply of homes available for renters who are driving up the demand, the real estate platform said.

Mortgage rates have ballooned over the last two years as the Federal Reserve has hiked rates to their highest levels in two decades to battle inflation which spiked to a 40-year high at one point. The jump in rates has pushed the borrowing costs for homes making the prospect of buying a home unaffordable for Americans.

Last week, the 30-year fixed mortgage rate hit 8 percent. The last time it got that high was at the turn of the millennium. Some housing economists are begging the Fed not to raise rates again to give some relief to the sector that counts for 16 percent of U.S. economic activity.

When looking for homes, it may now just be cheaper to rent.

While historically it is always more expensive to buy than rent, the gap between the two is higher than it has been for years.

Hale pointed out that the expectation tends to be that rent prices tend to rise every year—”although they are not doing that right now,” Hale said—compared to buying a home, where mortgage payments are fixed based on the interest rate an owner would have agreed on upon purchasing a house.

But that gap is getting bigger, she told Newsweek.

“It’s obviously going to depend on the specifics for any one person, but the gap is so large that in order for buying to make sense, people are really going to have to commit to being at a home for a long time,” she said.

The cheapest city in America to rent in September was Oklahoma City, where rent was about $1,000, according to realtor.com. To buy a home in the city will cost an average of $325,000 with a 20 percent down payment, meaning it will take 25 years for it to be cheaper to pay the monthly costs than to rent, according to a tool by the real estate firm.

“For most areas that you would need to stay at a home in order for that to make sense, typically it’s five to seven years,” Hale said.

Where to go for cheap(er) rent

For renters, then, after Oklahoma City, Louisville in Jefferson County, on the border of Kentucky and Indiana, offers rent of about $1,200, a similar outlay for Columbus, Ohio.

Those markets, plus other parts of the country such as the South or the Midwest, do a good job of keeping up with demand from their population for housing, Hale said, and there is more available land to build. In costly areas, like the East and Central parts that include the likes of New York and Boston, they have to create land because there is little of it left in most of their downtown areas, pushing up costs and prices.

Realtor.com noticed that people are drawn to both the more affordable parts of the country—Birmingham, Alabama, or Richmond, Virginia—as much as they are willing to live in more expensive places, like Boston, Massachusetts, and Washington, D.C.

“It’s interesting that we’re seeing this split, that people are really drawn to some places because they’re more affordable and then other markets, even though they’re not as affordable people, are sort of headed back,” Hale said.

Part of the explanation could be that people are heading back to the office, she suggested.

“It could be the return to work that we’re still seeing this play out in the data, where people who might have moved out to the suburbs in the pandemic have to go into the office more often now,” Hale told Newsweek. “They want to try to cut down on their commute.”

As prices and the costs of mortgages continue to stay elevated, it will continue to be tough for Americans to buy homes and are likely to turn to renting, Hale said. Prices for homes are expected to stay high over the next three years, mortgage lenders say.

This may explain why Rents are up than before the pandemic, according to Hale, as there is growing demand for homes. But over the next six months, the increased availability of rental properties may outgrow their demand, and thereby put pressure on prices down.

“I think we’re going to be in an interesting tug of war in the rental market between more households choosing to rent because of its affordability,” Hale said. “But supply is going to win out a little bit. So, we’re going to see, I think, small declines in rents over the next probably six months to a year as the market kind of adjusts to that.”