Owning a home has rarely been this much more expensive than renting
Insurance, upkeep, and high mortgage rates skew the buying vs. renting math.
On paper, owning a home is almost always more expensive than renting — about 14% more, on average, after factoring in expenses like insurance, taxes, and upkeep.
But the difference has grown much more extreme in recent years as just about all homeownership costs have ballooned.
How extreme? Exact cost estimates vary, but recently the premium for homeownership has been at least 35% over renting, a level that’s near historical highs and is likely to persist.
“We’re well, well beyond what the typical historical difference is if you were to buy an entry-level home versus rent a starter home,” said Rick Palacios Jr., director of research at John Burns Research and Consulting. “I think that’s a big part of why you see the resale market in a recession.”
Palacios’s firm has found factors like rising homeowners insurance premiums explain much of the growing gap. Higher mortgage rates don’t help either. Leaving other factors constant, it would take mortgage rates to be at 3.5% for the buying versus renting math to return to historical averages.
Commercial real estate investment firm CBRE pegs the premium to buy versus own at about 35% earlier this year, with the dip in mortgage rates in the fall helping bring that level down from a record high of 52%. Their measure includes the cost of mortgage insurance that most lenders require but doesn’t factor in expenses like homeowners insurance or upkeep.
“If anything, what we present … is a very conservative approach, said Travis Deese, associate director for multifamily research at CBRE. “It likely is a lot higher than that.”
The differential might get a bit less extreme next year if mortgage rates slowly drop and rents creep up, CBRE found. But stubbornly high home prices will prevent the premium from moving too much. The company expects the premium to end 2025 at around 25%.
Read more: Mortgage rates are still increasing — is this a good time to buy a house?
Ownership dreams
Buying versus renting is a fierce debate in personal finance circles, and both factions come armed with talking points. Buyers point to how they’re building equity and shielding themselves from the looming threat of rent increases. Renters tout their maintenance-free lifestyles and the ease of moving if they want to try living somewhere new.
The choice is ultimately personal, and buying remains the long-term goal for the majority of Americans. But while home ownership costs have continued to move higher, renters have recently gotten a little bit of a break.
Like home prices, rents are still markedly higher than pre-pandemic levels, but aggressive apartment construction has helped minimize further increases this year. Nationwide, median rents rose just 0.2% in October from a year earlier, according to Redfin, although areas with less construction, like the Northeast and Midwest, saw larger jumps.
Brooke Merino, 26, knows the calculus. She works in sales, helping renters in the Denver area find apartments, and has recently seen some buildings offer discounted lease renewals.
Her own rental, a two-bedroom home, costs her just over $2,500 a month for rent and utilities. And she recently closed on a $525,000, four-bedroom, two-bathroom house in Englewood, Colo. Her mortgage payment will be about $3,500.
“I don’t mind renting, but I’m at the point where I want to buy and move forward,” Merino said. “It was just a matter of determining what I was comfortable with, and what I knew I could afford.”
In all, Merino feels she got a deal: The home she bought had lingered on the market and saw several price reductions, and she locked in a sub-6% mortgage rate just before rates began rising again this fall. She’s looking forward to having more space and a large yard for her dog.
Many prospective homeowners haven’t been so lucky. Average mortgage rates of around 7% are a bit lower than they were this time a year ago, but median home prices have been stubbornly stuck close to all-time highs.
“The one-year outlook is for very little change in home prices, rents, and mortgage rates,” said Matt Vance, Americas head of multifamily research at CBRE.
Fannie Mae, which surveys consumers monthly on their feelings about the housing market, found in October that a record high 36% of consumers say their next move will be to rent rather than buy. The rental preference has been growing slowly in recent years. Three years ago, 26% said they would be likely to rent.
Savannah West, 28, opted to become a renter again after renovating a three-bedroom, two-bathroom fixer-upper she and her partner bought in Douglasville, Ga., in 2021 proved daunting.
“It felt like a really sweet deal, but we were spending thousands of dollars almost every month on home improvement supplies,” West said. “We lived at Home Depot.”
West, an editor at lifestyle website Home & Texture, was also growing tired of making the 30- to 40-minute drive from the suburbs to Atlanta for events. So over the summer, her family moved into a loft in the city, renting out their suburban home to cover their mortgage payment.
She likes being able to walk to nearby restaurants and bars and takes her daughter to the city’s many activities. While renting suits her for now, she’s considering purchasing a condo in Atlanta in the future.
Real estate agent Iain Phillips is generally a fan of buying, perhaps an unsurprising stance for someone in the business of selling homes. But he understands when his clients opt to continue renting, especially in expensive Orange County, Calif., where he works. Several first-time homebuyers he’s working with will likely have payments of $4,000 or $4,500 a month to buy instead of $3,000 to rent.
He advises potential buyers to get comfortable with the size of their monthly payment before committing to a purchase and plan on staying in their homes for at least five years.
“You don’t want to be house-poor in this economy,” Phillips said.
Read more: First-time homebuyer in 2024: What you need to know
Claire Boston is a senior reporter for Yahoo Finance covering housing, mortgages, and home insurance.
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