Renting is cheaper than buying in most housing markets right now

Photo (c) Daniel Grill - Getty Images

Rising mortgage rates and record-high home prices have changed the equation

With mortgage rates hovering around 3% throughout the pandemic, the cost of a mortgage was less than the comparable rent in many markets. That was one reason for the sustained increase in home sales.

But now the script is flipped. A recent report from Zillow shows that the monthly mortgage payment is more than the cost of renting in 45 of the nation’s top 50 housing markets. 

Two things have changed. Interest rates have surged, nearly doubling from recent lows. Meanwhile, the price of homes continues to rise. In its latest report for May, the National Association of Realtors (NAR) found that the median home price was a record-high $407,000.

When you put that together with higher mortgage rates, you get a monthly payment for a typical home that is well over $2,000 a month. Zillow Economist Nicole Bachaud says the recent surge in mortgage rates to nearly 6% could bring big changes to the housing market.

“We are already seeing signs of waning demand, and expect these recent rate hikes to quicken the market's needed rebalancing,” Bachaud said. “While shoppers will likely experience less competition for homes than the frenzied recent months, their purchasing power has dwindled." 

Rents haven’t risen as fast

Even though more people are being pushed into the rental market, the numbers don’t show a sharp increase in the cost of renting. In fact, a recent report from rental site Zumper shows just the opposite.

Zumper’s National Index suggests that rent price increases are slowing. According to the report, the median one-bedroom rent is up 0.5% from May to June. It's another all-time high, but it's also a much more reasonable growth rate than the one to two percentage point increases that became the norm during the height of the pandemic.

The median cost of a two-bedroom rental is down a significant 2.9% from May to June, a signal that some consumers who’d put off buying a home are finally making the jump as housing prices begin to level off. 

New York City rent is still the highest

Median rent is the highest in New York City, where a typical apartment costs $3.600. Oakland, Calif., has the 10th-highest rent at $2,100 a month.

"Although rents have accelerated since the start of 2021, the rapidly rising cost of a mortgage still makes rent the cheaper option nearly everywhere,” Zillow concludes.

A typical rent payment in May is more expensive than a mortgage payment with a 20% down payment, including taxes and insurance, in just five of the 50 largest U.S. metros. In May 2019, renting was more expensive in 28 of those metros. 

Zillow analysts say home values finally turned the corner in May to show a slightly slower pace of annual growth after annual price appreciation set new record highs for 13 straight months. The current growth rate is 20.7%, which is down from 20.9% in April. 

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