Renting a home has never made more sense, recent data shows

Mark Twain once said, “Buy land. They’re not making it anymore.”

Many people who are deciding whether to buy or rent a house are tempted to agree. Few probably know of Twain’s lifetime of business failures, which eventually bankrupted him.

Those who follow his advice about land might find themselves in similarly dire straits.

That’s in part because the gap between the cost of buying and renting a house today is wider than at any time in recent history. And it’s also because the air is leaking out of the US housing bubble with record prices and mortgage rates at 20-year peaks.

That means buyers run the risk of making punishingly high monthly mortgage payments only to potentially suffer a capital loss when they decide to sell.

If they hope to wait out a housing market downturn, such as the one currently playing out, the Case-Shiller National Home Price Index has some bad news for them. It shows that it can take as long as six years for prices to recover after a downturn.

So, does renting really trump buying in today’s market? Let’s look at the data.

Rentals “show well”

Headlines screaming about unprecedented rental increases make it hard to believe that renting is any better.

Technically, they aren’t wrong. In the last two years alone, rental prices jumped more than 20% in major metropolitan areas. Nationally, average price hikes hit a historic high of 15.3% year-over-year in the first quarter of 2022, according to RealPage.

But here’s the catch: that figure is largely skewed by the crash in the rental market in 2020, when Covid forced landlords to slash rents to attract tenants.

In fact, if you average the rent hikes over the last three years, they rose only 6.3% per year, according to a report in March by the National Multifamily Housing Council (NMHC).

When you adjust those hikes for inflation, they come to 1.2% per year—lower than the 1.5% annual price hikes for the prior five years.

Renters are also generally happy with their choices.

A survey of 2,000 renters released in August by RealPage found that “...two-thirds were satisfied with their current housing situation, preferring the financial freedom afforded by being able to rent more cheaply than buy in the areas where they want to live, as well as the flexibility for remote work and trying new locations.

”Over half of Gen Zers felt that renting was a better option than buying, and almost two-thirds of all those surveyed said they were renting in neighborhoods where they couldn’t afford to buy.

Once-soaring house prices are slowly starting to drop despite a dearth of deals

Meanwhile, prices in the housing market, savaged by 7%-plus mortgage rates, are beginning to slip.

Prices tracked by the S&P CoreLogic 20-City Case-Shiller Home Price Index fell 1.2% year-over-year in June. The drop marks the fourth month of decline and the worst stretch of downward price movements since the Great Recession.

Ten of the cities declined:

Worse, those mortgage rates are freezing up activity in the market.

As financial analyst Wolf Richter recently wrote, “What we’re seeing is that demand has vanished, and supply has vanished in equal measure because the homeowners who have a 3% mortgage are not buying a new home, and so they have vanished as buyers; and are therefore not putting their current home on the market, and so have they vanished as sellers."

No one wants to trade a 3% mortgage for a 7%-plus mortgage, so existing home sales have slowed to a crawl.

The gap between buying and renting has never been higher

According to a recent report by Reventure Consulting, the median rent in America is about $1,850 per month, about 32% cheaper than the median cost to buy, which is $2,700 per month.

The difference was less than $200 in 2022. In 2023, the gap surpassed $800. “This gap represents the largest difference between renting and buying in US history,” Reventure wrote.

A report earlier this year from Realtor.com found that, “In 45 of the 50 largest US metros, the monthly cost of renting a home is lower than buying a starter home, and despite higher rents, renting has become relatively more affordable than buying year-over-year.”

Decision criteria

The typical process for deciding whether to rent or buy a home is to use a so-called crossover analysis tool. These are available on the internet from a variety of services.

You enter factors such as your mortgage rate, down payment, house price, length of stay, and comparable rent, and the site calculates the monthly and total costs for each option.

The site also calculates the “crossover”—the date at which buying becomes less expensive than renting.

Unfortunately, the current market is unusual, and those tools can give misleading results.

The existing house purchase market is mostly frozen but on a downward trajectory. Reventure warns of a catastrophic 35% decline. Most observers think a 20% fall is not out of the question.

Even the overly-optimistic National Association of Realtors expect a slight decline this year.

These estimates are all contingent on mortgage rates.

With the Fed saying that it will not cut rates until late next year, at the earliest, it seems likely homebuyers could be in for an extended period of high mortgage payments — and potentially a loss upon selling.

Meanwhile, renters couldn’t care less.