Track your rental property performance for FREE

Learn More

Renting is cheaper than owning in all but four US metros

Renting is cheaper than owning in all but four US metros
by Brad Cartier, posted in Newsletter

Brooklee Han of Housing Wire reports on data from the National Association of Realtors (NAR) that shows that of the 1.1 million properties listed for sale in April, 25% had a price below $256,000, which is the maximum price of a home that “households earning the national median income of $75,000 can afford.”

Lily Katz and Taylor Marr of Redfin report on similar data showing that there are only four U.S. metros (Detroit, Philadelphia, Cleveland, and Houston) where buying a home is cheaper than renting. Reportedly, the typical U.S. home costs about 25% more per month to own than the cost of renting. 

Homeownership premium high

Source: Redfin (June 2023)

According to Redfin Deputy Chief Economist Taylor Marr:

“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. When you own your home, your home pays you; when you rent, you and your home pay your landlord…But buying isn’t a feasible option for everyone. Some people move around a lot, so renting might make more sense because they won’t be in their home long enough to build equity. Many others simply don’t have the money for a down payment—a situation that has become increasingly common due to rising mortgage rates and elevated home prices.”

The affordability gap doesn’t appear to be slowing, according to Jeff Tucker of Zillow. Home value on the platform jumped 1.4% from April to May, the strongest growth since June 2022. The average home price hit $346,856, which is up 0.9% year-over-year and 0.8% below the July 2022 peak, and 3.4% above the recent January low. 

In addition to prices rising, Dana Anderson, also of Redfin, reports that “[n]ew listings of homes for sale fell 25% from a year earlier during the four weeks ending June 4 to their lowest level of any early June on record. The continued lack of new listings has pushed the total number of homes on the market down 5% year over year to its lowest level on record for early June.”

Low supply of new homes for sale

Source: Redfin (June 2023)

Indeed, Diana Olick of CNBC reports that the lack of supply is particularly pronounced when you consider that current homes for sale in the U.S. are about half of what it was in 2019.

Federal Reserve

Today, the Federal Reserve announced a rate pause following 15 months of rate hikes, according to AP News. The Fed left its benchmark rate at around 5.1%, the highest level in 16 years. “But in a surprise move, the Fed signaled that it may raise rates twice more this year, beginning as soon as next month.”

It was widely expected that the Fed would pause interest rate hikes in June, according to Greg Robb of MarketWatch. That said, persistently high inflation and a strong jobs market give many the impression that the Fed would slightly raise rates again. No matter, it is widely expected that the Fed will raise interest rates by two more 25 bps before the end of the year, according to Robb.

Christopher Rugaber of AP News reports that after the 10 straight interest rate raises, the Fed was expected to pause at this meeting. “But what might otherwise be seen as a “pause” will likely be characterized instead as a “skip.” The difference? A “pause” might suggest that the Fed may not raise its benchmark rate again. A “skip” implies that it probably will — just not now.”

Matt Grossman of the Wall Street Journal comments that the tight labor market means the Fed will likely skip rising rates at this meeting, but at future ones, it is expected to increase rates once again.

Homeowner activity and equity

ATTOM Data Solutions released its Q1 2023 U.S. Residential Property Mortgage Origination Report, which showed that only 1.25 million mortgages that were secured by residential property originated in Q1 2023. This is the lowest origination rate since 2000. The report also noted that the dollar volume of purchase mortgages dropped 18% quarter-over-quarter and 45% year-over-year to $216 billion.

The report highlights the top 10 U.S. housing markets with the greatest median down payments in Q1.

Highest down payment metros

Source: ATTOM Data Solutions (June 2023)

“[O]verall lending activity decreased from Q4 2022 to Q1 2023 in 97 percent of the metro areas analyzed, among those with a population of 200,000 or more and at least 1,000 total residential mortgages issued in the first quarter. That figure was down annually in every one of those metro areas, while total lending activity dropped at least 15 percent quarterly in 63 percent of those metros analyzed.”

CoreLogic released its Q1 2023 Homeowner Equity Insights report showing that U.S. homeowners with mortgages (63% of properties) saw an equity decrease of $108 billion year-over-year, a loss of 0.7%. Although home equity remains strong, this is the first drop in nearly a decade, according to CoreLogic. Homes with negative equity are up 4% over the same time period, highlighting an increase in distress in the housing market. 

Negative equity on the rise

Source: CoreLogic (June 2023)

Selma Hepp, Chief Economist for CoreLogic, comments:

“Home equity trends closely follow home price changes. As a result, while the average amount of equity declined from a year ago, it increased from the fourth quarter of 2022, as monthly home prices growth accelerated in early 2023. The average U.S. homeowner now has more than $274,000 in equity — up significantly from $182,000 before the pandemic. Also, while homeowners in some areas of the country who bought a property last spring have no equity as a result of price losses, forecasted home price appreciation over the next year should help many borrowers regain some of that lost equity.”

Find this content useful? Share it with your friends!