The typical U.S. renter pays $1,066 less each month than a new homeowner pays for a mortgage, taxes and insurance, according to Zillow.
That works out to $12,792 a year, and Zillow estimates renters who invest the difference could earn another $322 during the first year.
Renting is currently cheaper than buying in all 50 of the nation’s largest metropolitan areas, with some of the biggest gaps occurring in expensive West Coast markets.
For years, Americans have been told that buying a home is one of the surest ways to build wealth. But with mortgage rates and home prices remaining elevated, renters may have a significant financial advantage — at least in the short term.
A new Zillow analysis finds that the typical U.S. renter paid $1,948 a month in August, compared with $3,014 for the typical new home buyer's mortgage payment, property taxes and homeowners insurance. That leaves renters with an average monthly advantage of $1,066, or $12,792 over a year.
Zillow's homeownership calculation assumes a 30-year fixed-rate mortgage at 6.67% with a 10% down payment on a typical home. It does not include some additional expenses homeowners may face, including maintenance and closing costs.
The gap between renting and buying has also been widening. Zillow said the typical monthly cost for a new buyer increased by $140 over the previous six months, while typical rent increased by just $32.
"The idea that renting is a consolation prize is outdated," Zillow Chief Economist Mischa Fisher said, arguing that renters who save and invest the difference between renting and buying can potentially improve their financial position.
What happens if renters invest the difference?
Of course, renters only receive the full financial benefit if they don't simply spend the money they save.
Zillow calculated what would happen if a renter invested the $1,066 monthly difference at a return equal to the 10-year Treasury yield, which it put at 4.68% as of August.
Under that scenario, the investment would generate an additional $322 during the first year. Assuming rents and homeownership costs remained unchanged, Zillow said the accumulated savings and investment returns could reach about $72,000 after five years.
That calculation is illustrative rather than a guarantee. Rents, home prices, mortgage rates, taxes and investment returns can all change, and homeowners may benefit from rising property values and from building equity as they pay down their mortgages.
Biggest savings are in expensive markets
The rent-versus-buy gap varies considerably depending on where consumers live.
Zillow found renting costs less than buying in every one of the 50 largest U.S. metropolitan areas. The biggest difference was in San Jose, Calif., where the typical renter pays $3,815 a month while Zillow estimates the monthly cost for a new buyer at $11,698.
That's a difference of $7,883 a month, or $94,596 a year. Zillow estimates investing those monthly savings at its assumed rate could generate another $2,381 during the first year.
Other large gaps were found in San Francisco, where renting saves an estimated $5,413 a month; Los Angeles, at $4,441; and San Diego, at $4,235.
But the advantage isn't limited to California. Zillow calculated monthly rent-versus-buy savings of $3,511 in Seattle, $2,829 in Boston, $2,629 in New York and $2,200 in Washington, D.C.
Buying requires considerably more income
The analysis also illustrates how high home prices and mortgage rates have raised the income hurdle for would-be buyers.
Zillow estimates a household needs annual income of about $77,919 to afford the typical U.S. rental. A household purchasing a typical home with 10% down would need income of more than $120,500 to afford the mortgage payment, taxes and insurance — a difference of more than $42,000.
That doesn't necessarily mean renting will always be the better financial decision. Homeowners build equity and may benefit from appreciation, while renters can face annual rent increases and don't accumulate ownership in the property.
How long someone expects to remain in a home can also make a major difference. Zillow said its analysis generally favors renting for households expecting to stay in a home for five years or less.
For consumers deciding between the two, the comparison increasingly comes down to more than whether they can scrape together a down payment. With today's mortgage costs, the question is also what a renter could do with the money that isn't being spent on homeownership — and whether that money will actually be saved and invested.