Buying vs Renting a Home: Renting More Affordable in Most Markets

Family-in-backyard Should you rent a home or buy a home? There's no one simple answer. Everything depends on your unique circumstances and financial situation, impacted of course by what's happening with mortgage rates, home price trends and the availability of desirable, affordable houses where you live or want to live.

While the housing market constantly changes from these and other influences, a recent study suggests that renting is currently less expensive than purchasing in most housing markets. This lends strong ammunition to the argument that renting is the better strategy than buying right now if you're looking for the best bang for your buck.

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Where is Renting a Home Cheaper Than Buying?

A new report by ATTOM Data Solutions had some interesting findings, but the short answer is "almost everywhere":

Renting a three-bedroom, median-priced home is more affordable than owning a three-bedroom residence in 210 or 222 counties examined by ATTOM. That's currently a whopping 95% or markets in favor or renting rather than buying.
Average rents for three-bedroom homes are increasing more than median prices for single-family homes less than half the markets (46 percent) of the counties analyzed in the report.
The most populous counties where three-bedroom rents are rising faster than median sales prices for single-family homes are Cook County (Chicago), IL; San Diego County, CA; Orange County, CA (outside Los Angeles); Kings County (Brooklyn), NY, and Miami-Dade County, FL.
The most affordable counties for renting a 3-bedroom property are Jefferson County (Birmingham), AL (20 percent of average local wages needed to rent); Pulaski County (Little Rock), AR (23 percent); Cuyahoga County (Cleveland), OH (23 percent); Wayne County (Detroit), MI (24 percent) and Summit County (Akron), OH (25 percent).
The least affordable counties for renting are spread through the South, Northeast and West, including Kings County (Brooklyn), NY (126 percent of average local wages needed to rent); Indian River County (Vero Beach), FL (100 percent); Charlotte County, FL (outside Fort Myers) (84 percent); Monterey County, CA (outside San Francisco) (82 percent) and Riverside County CA (outside Los Angeles) (77 percent).

Home Affordability Is Decreasing

Rick Sharga, executive vice president of market intelligence for ATTOM said "What a difference a year makes. Last year our study concluded that it was more affordable to own than to rent in 60 percent of the markets analyzed."

He added "But with mortgage rates doubling, monthly payments for new homeowners rose by 45-50 percent compared to a year ago, even though home price appreciation has slowed down dramatically. This has made renting more affordable in the majority of markets, despite rental rates continuing to rise over the past year."

Why Is it Better to Rent a Home Now?

Simply put, it's a combination of factors. Home prices remain near all-time highs, and mortgage rates are at multi-decade highs. By one estimate from the National Association of Realtors and another from ATTOM, home affordability is at or near record lows.

Even when potential homebuyers can over cover the financial hurdles to get a chance at homeownership, there are too few desirable and affordable homes available to buy. Why? Except in limited circumstances, many existing homeowners are reluctant to put their homes up for sale and buy another, as doing would see them trade low-rate mortgages and relatively affordable monthly payments for higher ones -- and that only if they too can locate a desirable, affordable home to buy.

Of course, even in adverse conditions, the shortage of available homes to buy has also affected rental markets, pushing prospective buyers over into the rental market. This in turn has driven rents up, and this issue is most acute in places where adding new housing supply is difficult, most commonly in older, more built-out metro areas and surrounding inner-ring suburbs.

It's true that renting a home now allow you to you sidestep adverse homebuying conditions to wait for a better opportunity. However, when conditions eventually do turn more favorable, you may be just one of a great many folks jumping into the market at the same time. Even then, there's no guarantee that when you do jump in you'll be able to find a home in a place you want to live at a price you can afford to pay. You may potentially end up being a renter longer than you wanted or hoped to be.

Depending on your longer-term plans, it can still make sense to take the plunge and buy a home if you can find one that meets your needs, provided you can qualify for a mortgage large enough to cover it. Mortgage rates may be high for a while, but mortgages can be refinanced to lower rates when they come, so you'll have at least a chance of lower housing costs in the future. That's less likely to be the case with renting. As well, and while home prices may not continue to appreciate as strongly as they have in recent years, they generally will climb over time, strengthening your finances in a way that renting simply can't. In addition, as a homeowner, you won't have to worry about your rent increasing over time.

Homeownership Protects You From Rent Increases

Phil Georgiades with FedHome Loan Centers seconds those sentiments.

"Buying a home is also a hedge against inflation and prices continuing to rise. Once you've bought your home, you're locked into that price. The real value of the dollar tends to drop over time. Hence, paying a fixed amount for your home helps protect you against inflation," says Georgiades.

Put another way, your monthly principal and interest payment on a home doesn't increase with inflation. But your monthly lease probably will, and may rise when you least expect it.

"Renters typically don't have any control over if and when the monthly rent increases. That can leave you priced out of the neighborhood," explains Beatrice de Jong, consumer trends expert at Opendoor. "Worse, the landlord may decide to sell a home you are renting at any time, leaving you scrambling to find a new place to live."

Also, home values generally remain consistent and may even rise. The opposite is true when, for example, you buy a car - which steadily depreciates.

"And owning property allows you the freedom to customize your home to your liking. You can renovate the kitchen or bathroom, decorate to your desire, and host parties," de Jong says. "You don't have that flexibility as a renter."

When Should You NOT Buy a Home?

Of course, renting has its perks, too. You aren't tied to a particular address. If your job relocates or you want to move on, it's a lot easier to pick up and do so with few complications.

It can also be easier to financially qualify as a tenant than as a mortgage borrower.

And if you can't make your rental payments, the worst-case scenario is eviction. You don't risk losing your home.

As a renter, if today's tough market conditions should change to your benefit and the opportunity to buy a home presents itself, you won't have the added burden of having to sell an existing home to move to your next one. That can simplify the process of buying, allowing you to act more quickly than some other potential buyers might.

Lastly, as mentioned above, renting is actually more affordable in many markets right now. At least on a relative basis, you'll be able to save some money.

The ATTOM report noted that "median single-family home prices are rising faster than average weekly wages in 93% of the 222 counties" analyzed in the report. That said, rents too are rising; average fair-market rents increased more than average local wages, but in far fewer (70%) of the areas covered in the report.

This means that wages are increasing faster than rental costs in 30% of the areas, a relatively better figure than the only 7% of markets where wages are increasing faster than home prices.

Is Buying a Home Right for You?

Are you ready for the responsibility of owning - which includes paying your mortgage debt and maintaining and repairing the property? If so, you could be an ideal buyer candidate.

"More importantly, you have to be able to afford the down payment and monthly mortgage payments. That means having money saved and counting on a reliable job that pays well," says Georgiades. "Another consideration is credit. You don't need perfect credit to qualify for a mortgage, but if you have no credit history or are recovering from bankruptcy, spend a year renting and re-establishing your credit."

If you can get preapproved by a lender, you're in good shape.

But banks are also looking to see that you have a job "and can verify your income on the date you apply for the loan and the date that you close," says Hollander. "Banks don't condition your loan approval on the fact that there may be layoffs in your industry" or that the economy might change in the future.

This article was updated by Keith Gumbinger.

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