If you are debating whether to rent or buy your first home: it is cheaper to rent. In fact, it's gotten even cheaper since last year.
Steep home prices, high mortgage rates and marginally declining rental costs are making renting a studio-to -two bedroom apartment nearly $1,200 ($1,183) less expensive per month than buying a starter home in 47 out of the top 50 metros in the U.S., according to an analysis by Realtor.com.
And that is nearly $500 cheaper per month to rent than even last year, when renting was the cheaper option in 45 states.
In August, 2022, renting a 0-2 bedroom unit in these markets was $700 cheaper than buying a starter home in rent-favoring markets.
The report defines a starter home as a home with two or fewer bedrooms and assumes a 7% down payment for first-time buyers (based on the national average since 2018) on a 30-year fixed mortgage rate to calculate a monthly mortgage payment. It also includes HOA fees, taxes, and homeowner’s insurance averaged at metro levels as part of the costs.
The average U.S. fixed interest rate for a 30-year lingered above 7% this week as the Federal Reserve paused their interest rate hikes, according to Freddie Mac. During the same period in 2022, the 30-year, fixed-rate mortgage averaged 6.2%.
Renting became more attractive in August as the median asking rent declined -0.5% year-over-year in rent-favoring markets, a trend significantly different from 12 months ago.
From August 2022 to August 2023, the average 30-year fixed mortgage rate jumped from 5.2% to 7.07% and the average monthly cost to buy a starter home in these markets climbed by 21%, increasing from $2,500 to $2,959. As a result, the monthly savings from renting a 0-2 bedroom apartment in rent-favoring markets were $483 higher compared to the prior year.
Metros: Which metro areas are growing fastest? Since 2019, this is where most folks are flocking.
The median existing-home sales price in August climbed 3.9% from one year ago to $407,100 – the third consecutive month the median sales price surpassed $400,000, according to the National Association of Realtors.
As home prices continue their march up, the gap between buying and selling is getting wider.
In 47 of the 50 largest U.S. metros, the average monthly cost of buying a starter home in August was $2,959 or 64% higher than the cost of renting ($1,776). Last year, however, buying a 0- 2 bedroom home in the rent-favoring markets would only cost $700 or 36% more than renting in August 2022. (The median rent in August 2022 for 0-2 bedroom apartment was $1,800 and the monthly payment to buy a starter home was $2,500).