Trying to buy a home? It might be cheaper to rent.

Photo (c) Ronnie Kaufman - Getty Images

Rents are rising much slower than home prices

Make no mistake, putting a roof over your head is an expensive proposition, whether you’re buying or renting. But lately, the scales appear to be tipping toward renting.

Industry data show new lease rent rose slightly less than 2% on an annual basis in May. Compare that to the two previous years when rents skyrocketed by 25%. 

In a recent study, real estate brokerage Redfin found that there are only four major U.S. housing markets where it’s cheaper to own a home than to rent one – Detroit, Philadelphia, Cleveland, and Houston. Nationally, renting is 25% cheaper than buying.

Redfin analyzed prices for single-family homes, condos/co-ops and townhouses in the 50 largest U.S. metros. Researchers estimated what a homebuyer’s monthly housing payment would be on those properties using the estimate of the homes’ value in March and a 6.5% mortgage interest rate—the average rate in March. 

Then, researchers estimated what the monthly rent would be on those same homes using the Redfin Rental Estimate. On the purchase side of the equation, researchers assumed a 5% down payment, a homeowner’s insurance rate equal to 0.5% of the purchase price, and 1.25% annual property-tax rate if no tax records were available. 

‘Buying often makes sense’

“Buying a home often makes more financial sense than renting if you can afford a down payment and monthly mortgage because you’re building equity,” said Redfin Deputy Chief Economist Taylor Marr. “When you own your home, your home pays you; when you rent, you and your home pay your landlord.” 

That has always been the popular assumption and may be one reason so many people want to own their homes. But Marr acknowledges that in this environment, buying isn’t a feasible option for everyone.

Some personal finance experts say that renting a home, in many cases, is a better option when it comes to building wealth. While it’s true that home values are likely to increase over time, it’s not always the case, and millions of homeowners discovered during the 2008 housing market crash.

‘Opportunity cost’

The money required as a down payment on a home can be viewed as an “opportunity cost,” meaning it could have been invested in other ways than to purchase a home. 

For now, the monthly cost of owning a home is rising much faster than rents. According to Redfin’s study, mortgage rates would have to plunge to even the playing field.

Even if the 30-year-fixed mortgage rate dropped to 5%, Redfin says the median estimated monthly mortgage payment for homebuyers would be $2,993, or 10% higher than the $2,716 median estimated monthly rent. 

Today, Redfin puts the estimated national monthly mortgage payment $3,385, compared to a national average rent of $2,715.

Take a Home Warranty Quiz. Get matched with an Authorized Partner.