The American dream used to be all about homeownership, but with average mortgage rates topping seven percent and a fixed 30-year term, that idea is less attractive than ever.
New data has shockingly shown that for the majority of Americans, it is now actually significantly cheaper to rent than to buy.
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While conventional wisdom has always taught us that buying is better than renting, this is not the case in these uncertain times.
Data from Realtor.com for August 2023 shows that renting an entry-level apartment is currently cheaper than buying one in the vast majority of cases.
This shocking real estate truth applies to all four regions – the Northeast, the Midwest, the South and the West.
The savings are even more significant for urban tenants, where purchases are an average of 72 percent more expensive each month.
The US Sun spoke with Realtor.com economist Jiayi Xu to get a handle on the situation.
Hell-bent on rent
“Renting an entry-level home is a cheaper option than buying one in all four regions,” Xu said.
“The benefits of rent are particularly pronounced in the West and Northeast regions, although these markets tend to have higher rents.”
For example, the average monthly rental cost in the Northeast is $1,923 per month, while the average monthly purchase cost there is $3,094, an increase of 60 percent.
The savings are even more pronounced in urbanized markets like New York, Los Angeles and San Francisco, where renting can be twice as cheap as buying.
But Austin, Texas, is at the top of the list of markets that favor renting.
In this popular tech city, the average monthly cost to purchase an entry-level home is $3,946 — 136.3 percent more than the average monthly rent of $1,670.
FOUR REASONS IT’S CHEAPER TO RENT
The housing market and other factors related to home buying are the main reasons why rents are relatively cheaper.
First, mortgage interest rates drive up the cost of purchasing a home.
The average interest rate for a 30-year fixed-rate mortgage is 7.77 percent, according to Realtor.com.
At the same time, real estate prices remain around 37.7 percent above pre-pandemic levels.
There are fewer homes on the market than last year, leaving buyers with fewer affordable options.
Third, homeowners face additional costs such as property taxes and maintenance costs that renters do not have to worry about.
And although rents have increased steadily over the years, statewide rents only increased 0.6 percent in 2023 compared to the previous year, according to Realtor.com.
STILL NEED TO BUY?
While it’s rare for both home prices and mortgage rates to be so high at the same time, this one-two punch isn’t enough to dissuade some from buying.
Because buying a home is not a purely financial decision.
Both logistical life factors and sentimental reasons could make purchasing a home more attractive to buyers in their hearts than it is on paper.
If you’re looking to buy, Xu says it’s “crucial to carefully consider the financial implications.”
“Factors such as monthly housing budget, funds available for a down payment, post-purchase savings prospects and speed at which savings can be replenished are critical in this decision-making process,” she said.
“It is important to carefully consider these financial considerations when considering whether to buy or wait.”
PURCHASE ADVANTAGES – THE “5 YEAR RULE.”“
One advantage of buying sooner rather than later is the opportunity to build equity in your home.
Equity refers to the value added to your home after you purchase it due to market trends or improvements you make to the property.
“Waiting indefinitely may not be the optimal strategy, especially for those looking to build long-term equity,” Xu said.
“It is critical to carefully consider your individual circumstances and goals when deciding whether you should enter the real estate market in the current climate.”
In most cases, you will need to hold on to the property for at least five to seven years to see significant equity growth.
To help you decide, Realtor.com has a handy rent-to-buy calculator that can help you determine how long it would take for the equity built through home ownership to exceed the potential savings from renting.
But of course, there are other important factors to consider as to whether or not you should buy a home.
“For example, how long you plan to live in the next apartment, how long you plan to stay in your current job, and how your family situation might change,” Xu explained.
If you’ve decided to make the move into home ownership, the perfect time of year is just around the corner.
Historical data shows that property prices often fall from their peak in the first week of October,” Xu said.
“Competition is decreasing and housing inventory is increasing, particularly in contrast to the busy summer months.
“This timing may provide a favorable environment to make the leap into homeownership.”
If you want to shop cheaply, check out the 10 cheapest cities in the US.
And beware of the hidden costs of buying a home, including a mistake that could cost you up to $100,000.