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The Least Affordable Housing Market in Recent Memory: Why Renting Is a Great Option

Generations of consumers have long embraced homeownership as part of the American dream. However, in recent times, the dream seems to be fading away. "Housing is becoming a luxury good," warns Christopher Mayer, a Columbia...

Generations of consumers have long embraced homeownership as part of the American dream. However, in recent times, the dream seems to be fading away. "Housing is becoming a luxury good," warns Christopher Mayer, a Columbia University economist. But here's the silver lining - it's actually a great time to rent. The soaring costs of homeownership have turned the rent-vs.-own equation on its head, making renting far more affordable in most of the nation's largest cities.

According to the National Association of Realtors, the median sales price for existing homes has risen by over 40% from early 2020 to mid-2022, reaching a seasonal peak slightly above $400,000. And the prices are still on the rise, with a 4.4% increase in December 2023 compared to December 2022. On top of that, mortgage rates have doubled since early 2022, currently standing at 6.8% as of mid-February, compared to just over 3% at the beginning of 2022.

These two trends combine to create a daunting scenario for potential homeowners. Let's do some quick math. Imagine purchasing a $400,000 home with a 20% down payment. At an interest rate of 3.2%, your monthly mortgage payment for a 30-year term would be $1,383. But at 6.8% interest, the same mortgage would cost you $2,086. It's no wonder that Daryl Fairweather, chief economist at Redfin, calls it "the least affordable housing market in recent memory."

You might be wondering why home prices haven't dropped despite the rising mortgage rates. Well, there are a few reasons for this. First, developers haven't been able to keep up with the demand for new homes. Second, the COVID-19 pandemic and the remote work boom have fueled even more demand as people seek larger homes. Lastly, homeowners with historically low mortgage rates are reluctant to sell. This combination of factors has created what economist Christopher Mayer describes as a "perfect storm" for consumers - albeit in a bad way.

Traditionally, homeownership has been seen as a rite of passage, with two-thirds of Americans owning homes, considering it their main asset. However, the exorbitant costs of buying a home are reshaping this notion. The rent-or-buy calculation increasingly favors renters. Potential buyers have to consider factors such as how long they plan to stay in the home, the amount they can put down as a down payment, the interest they'll pay on the mortgage, and the likelihood of the home appreciating in value. On the other hand, potential renters take into account current rental rates, the possibility of rent increases, and the costs of rental insurance.

In a typical housing market, buying a home might make sense if you plan to stay for at least five years. This would allow you to build equity and benefit from the home's appreciation. However, the skyrocketing housing prices have made it unaffordable for many potential buyers. As Christopher Mayer states, "For a lot of people, it's not an issue of choice."

Renting has become increasingly attractive in the current housing market. A 2023 analysis by Realtor.com found that renting was cheaper than buying in 47 out of the 50 largest metropolitan areas. For example, in Austin, Texas, the monthly cost of buying a starter home was $3,946, while renting would only cost $1,670 per month. The monthly savings amount to a staggering $2,276. Only three metro areas - Pittsburgh, Memphis, and Birmingham - remained cheaper for buying.

To illustrate this further, let's look at a firsthand experience. Elizabeth Renter, a senior writer at NerdWallet, analyzed the numbers for central Durham, North Carolina, and decided to rent instead of buying. The average home price in central Durham is $550,000, which would translate to a monthly payment of around $2,868 for principal and interest, assuming a 20% down payment and a 6.8% interest rate. On the other hand, the average rent in central Durham is approximately $1,700 per month, making renting the more affordable choice.

Rents across America have been rising, albeit not at the same pace as home prices. According to NerdWallet, the average nationwide rent in January was $1,958, just one dollar higher than in December. Rents are now 29% higher than before the pandemic. However, economists don't expect a dramatic spike in rents in the coming months, partly due to an increase in the construction of rental housing. Danielle Hale, chief economist at Realtor.com, suggests that rents may even go down or remain stable, providing an advantage for renters.

Looking ahead, economists don't anticipate homeownership becoming more affordable without a significant decrease in interest rates, home prices, or both. Economic forecasts suggest that mortgage rates might ease later this year, following predicted rate cuts by the Federal Reserve. However, home prices are likely to remain high due to the limited supply and homeowners' reluctance to sell. As Odeta Kushi, deputy chief economist at First American Financial Corporation, puts it, "Unless you have to sell, you'll just stay put."

In conclusion, while homeownership has long been seen as the ultimate goal, the current housing market has made renting a more favorable option for many. The exorbitant costs of buying a home, coupled with rising mortgage rates, have created an unaffordable housing market. Renting now presents an opportunity to save money and avoid the financial strain of homeownership. As the famous saying goes, "Home is where the heart is," and for now, many hearts are finding solace in the rental market.

The current buy-vs.-rent equation favors renters.

Image: The current buy-vs.-rent equation favors renters.