Nationwide, the typical home costs an estimated 25% more per month to own than rent; however, buying is more affordable than renting in Detroit, Philadelphia, Cleveland and Houston.
(NASDAQ: RDFN) — There are just four major U.S. metropolitan areas where it would be cheaper to buy than rent the typical home—that is, the typical home has an estimated monthly mortgage cost lower than its estimated monthly rental cost. That’s according to a new report from Redfin (redfin.com), the technology-powered real estate brokerage.
In Detroit, the typical home is 24% less expensive to buy than rent—the largest discount in percentage terms among the 50 most populous metros. The median estimated monthly mortgage payment for Detroit homebuyers is $1,296, compared with an estimated monthly rent of $1,697. Next comes Philadelphia (7% ownership discount), followed by Cleveland (4% discount) and Houston (1% discount).
On average, in the 50 most populous U.S. metros, the typical home costs 25% more to buy than rent, with an estimated monthly mortgage payment of $3,385 and an estimated rent of $2,715. Redfin estimated monthly housing payments using the Redfin Estimate of the homes’ value in March and a 6.5% mortgage interest rate—the average rate in March. We estimated monthly rents on those same homes using the Redfin Rental Estimate.
“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,” said Redfin Deputy Chief Economist Taylor Marr. “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.”
In Detroit, 80% of properties are cheaper to buy than rent—the highest share in the U.S. Next comes Philadelphia (59%), followed by Cleveland (57%) and Houston (52%). That compares with a nationwide share of 19%.
Mortgage Rates Would Have to Fall Significantly for Owning to Become Cheaper Than Renting Across the U.S.
Detroit, Philadelphia, Cleveland and Houston are outliers. For homebuying to become cheaper than renting in other parts of the country, mortgage rates would need to fall substantially.
If the 30-year-fixed mortgage rate dropped to 5%, the median estimated monthly mortgage payment for homebuyers would be $2,993, or 10% higher than the $2,716 estimated monthly rent. That’s significantly lower than today’s 25% homeownership premium.
If rates dipped to 4%, the estimated premium would shrink to 1%. And if they fell back down to 3%, it would actually be 7% cheaper to rent. Please note that these calculations use estimated home values from March and prices and rents could change significantly if mortgage rates fall.
Mortgage rates will likely fall below 6% by the end of the year as the Federal Reserve makes progress in its fight against inflation, but they’re unlikely to return to 3% levels anytime soon, Marr said. A national survey by Fannie Mae found that 22% of consumers surveyed in April think mortgage rates will fall, up from 12% the prior month.
"I wouldn't encourage people to squeeze their budgets in order to buy a home when prices are falling and we're teetering on a recession,” Marr said. “In the years leading up to the pandemic, it made sense for some homebuyers to break the rule that says not to spend more than 30% of your income on monthly housing costs, but these times are more risky, so it makes sense to be a little more conservative.”
In the Bay Area, Buying a Home Is More Than Twice as Costly as Renting
In San Jose, CA the typical home is 165% more expensive to buy than rent—the largest premium in percentage terms among the 50 most populous metros. The median estimated monthly mortgage payment for homebuyers is $11,049, compared with an estimated monthly rent of $4,176.
Next comes San Francisco (139% ownership premium), Oakland, CA (99% premium), Anaheim, CA (91% premium) and Seattle (88% premium).
In the aforementioned metros, 0% of homes are cheaper to buy than rent.
In Pandemic Boomtowns, Virtually No Homes Are Cheaper to Buy Than Rent
In Sacramento, CA, Las Vegas, Phoenix and Austin, TX—metros that not long ago were fairly affordable but exploded in popularity and price during the pandemic—there are also virtually no homes that are cheaper to buy than rent.
In Sacramento and Las Vegas, less than 1% of homes are cheaper to buy than rent. In Phoenix, the share is 1%, and in Austin, it’s 5%. All four metropolitan areas ranked on Redfin’s list of most popular migration destinations during the pandemic.
���Housing affordability is an issue in Las Vegas. During the pandemic homebuying boom, we had a lot of people moving in from high-priced coastal areas. That caused home prices to soar faster than wages, creating a disadvantage for locals looking to buy," said local Redfin Premier real estate agent Shay Stein. “The good news is that because the market has slowed, sellers are willing to accept offers from buyers who use FHA loans and down-payment assistance programs, and some are even throwing in money to help with mortgage-rate buydowns. All of that was unheard of during the 2021 homebuying frenzy.”
To view the full report, including charts, additional metro-level data, and methodology, please visit: https://www.redfin.com/news/rent-vs-own-2023
Redfin (www.redfin.com) is a technology-powered real estate company. We help people find a place to live with brokerage, rentals, lending, title insurance, and renovations services. We also run the country's #1 real estate brokerage site. Our home-buying customers see homes first with same day tours, and our lending and title services help them close quickly. Customers selling a home in certain markets can have our renovations crew fix up their home to sell for top dollar. Our rentals business empowers millions nationwide to find apartments and houses for rent. Customers who buy and sell with Redfin pay a 1% listing fee, subject to minimums, less than half of what brokerages commonly charge. Since launching in 2006, we've saved customers more than $1.5 billion in commissions. We serve more than 100 markets across the U.S. and Canada and employ over 5,000 people.
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