It is now much more expensive to purchase and pay off a home than to rent, pushing people away from locking in a mortgage for the time being.
Homeownership has always been one of the hallmarks of the American dream. But because of high inflation and the Federal Reserve driving up interest rates to historic levels as a result, for many would-be homebuyers, following through on a purchase is now a dream deferred.
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Last week, the average rate on a 30-year, fixed-rate mortgage rose as high as 8.03%, according to Mortgage News Daily, which tracks daily changes in rates. That is more than 2 percentage points higher than the 30-year rate was in February. The last time rates passed 8% was in 2000, according to separate records maintained by Freddie Mac.
CBRE found that a monthly new mortgage payment is 52% higher than that of the average monthly cost of a new lease.
“The costs of home ownership have gone up, and they have gone up on many fronts,” Greg McBride, chief financial analyst at Bankrate, told the Washington Examiner. “Home prices are still very high, and in most markets, they are rising further — mortgage rates have spiked to the highest level in 23 years, and in many parts of the country rising homeowner’s insurance or property tax costs are further squeezing homeowner budgets.”
The change over the past few years has been dramatic.
In the first quarter of 2020, right before the pandemic took hold, paying for a house was 4.5% cheaper than renting. Throughout much of the pandemic, the two metrics were about equal, but when the Fed began raising interest rates, things changed quickly. In the first quarter of last year, buying a home was just over 20% more expensive than renting, and by the first quarter of this year that had risen to 41%.
McBride said it might be a more prudent decision for some buyers to wait until the market returns back to earth.
“If you are another promotion away from a higher level of income, if you can use a couple of years to pay down debt and boost savings, you may be in a much better financial position in a couple of years to facilitate home ownership with a little bit more breathing room than would be the case today,” he said.
Shelton Weeks, the Lucas professor of real estate at Florida Gulf Coast University, told the Washington Examiner on Monday that several factors determine whether homebuyers should purchase a house or wait.
He said that buying a home depends on an individual’s financial conditions and what their prospects are for staying in a given market.
“What’s your planning horizon? How long do you think you are going to be in this market realistically? And if you can’t tell me that it’s 36 months or more at a minimum, then you need to rent because the transaction costs are simply too high to be going into that market to buy,” Weeks said.
Weeks also explained that a consumer’s location within the U.S. can make a big difference. Some areas have larger disparities between rent and purchase prices.
A report from Rent.com recently found that rent prices fell by just over 2% from the month before. The national median rent price is now $2,011, the cheapest price recorded since April. The decrease in rents from August knocked more than $40 off the national median price and is the largest monthly decline since last year.
But different parts of the country can have remarkably disparate average rental prices, according to the most recent data.
The highest year-over-year rental price growth was notched in the Midwest, although rents in that region remain the most affordable in the country, with the median price hovering at $1,435. The Northeast also experienced year-over-year price growth.
“Rents slid in the West as has been the case for several months, dropping 1.61% from September 2022. The South also saw yearly rent declines, albeit lower, at nearly one-third of 1%,” the report read.
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And while rental demand is hot because of the affordability crisis with housing, landlords aren’t likely reaping huge benefits at the expense of renters, according to Weeks. The property owners have had to grapple with higher costs on their end as inflation wracks the economy, making their profit margins from renting not as favorable.
“They are not making in economic terms what we would call ‘abnormal profits,’” Weeks said. “So when you look at what is happening from a landlord standpoint, particularly in markets like those metro areas in Florida — they’re getting hammered from the expense standpoint. … They have got a lot of downward pressure on their operating margins, it’s not like they are making a fortune off rising rents.”