Over the past year and a half, the Fed's rate hikes brought the average 30-year fixed-rate mortgage to over 7%—stirring up fresh debates about renting versus buying real estate.

On one hand, higher rates result in higher monthly mortgage payments and often exert downward pressure on home prices.

But renting doesn’t escape unscathed either. When landlords' mortgage payments rise, they often pass that increase onto tenants, though the transition can take time.

Given these factors, what’s the right move? Should you pull the trigger and buy a house in today’s market or continue renting in the hope of a better deal down the line?

Read to the end to understand what factors to consider and why it’s not just the interest rate you need to take into account. In fact, many of the considerations aren’t financial at all.

The relationship between interest rates and inflation

When interest rates are as high as they are, it’s tempting to deem renting the superior option, but it’s not so simple.

Rates are only as high as they are because of inflation. In an effort to slow price growth, the Fed raises interest rates to quash borrowing. In turn, less capital flows through the economy, putting the brakes on housing demand.

Without higher rates, house prices would likely be even more expensive than they are now. And while it’s true that higher rates produce larger monthly payments, so do higher home prices.

From your bank account’s perspective, there’s no difference. It’s all money out.

The financial implications of buying in a high-interest-rate environment

There’s no denying it: the rapid explosion of interest rates among advanced economies in the past year and a half has hit borrowers hard. The numbers speak for themselves.

Imagine you purchased a half-million dollar home with 20% down and a 30-year fixed rate mortgage when rates were 4%. What would your monthly mortgage payment be?

Less than two years ago, a 4% interest rate on a $400,000 mortgage ($500,000 less the down payment of $100,000) would cost you $1,909 per month.

Today, that same loan at 7% brings your monthly payment to $2,661.

In other words, the same-priced home would cost you 40% more ($752) in monthly payments. So, clearly the answer is to rent, correct? Not necessarily.

The cost of renting

On average, a typical U.S. renter in the 50 largest metropolitan areas pays roughly 40% less per month compared to a first-time homebuyer. While that sounds great, it doesn’t tell the whole story.

Yes, mortgage payments are often higher than rent payments, but they provide equity. Over time, as you pay off your mortgage—and if your home increases in valueyou gain increasingly more ownership, i.e., equity, in your home.

Ultimately, once the mortgage is paid off, you possess 100% equity in your home. Put another way, you own what is likely an appreciating asset.

Is home ownership a cultural phenomenon?

When home ownership is prevalent, it can be tempting to buy. After all, your friends are all homeowners and you don't want to miss out.

Interestingly, however, home ownership is often tied to particular cultures. For example, many Eastern European countries have homeownership rates exceeding 90%. At the same time, countries like Switzerland have rates of ownership that are less than half that (42%).

For their part, Americans tend to place significant value on owning a home. In fact, nearly three-quarters (74%) of respondents to a 2022 Bankrate survey deemed home ownership as very much a part of the "American Dream."

Renting vs. buying

Initial costsLower upfront costs (usually first the month’s rent and a security deposit)Higher upfront costs (down payment, closing costs, inspections)
FlexibilityEasy to relocateSelling a home can be time-consuming
MaintenanceLandlords typically cover most major repairs and maintenanceHomeowners are responsible for all maintenance and repairs
Investment potentialRenting provides “dry powder” that you can invest elsewhereYour property can appreciate substantially
Monthly costsWhile generally consistent, rent can rise unpredictablyUnder a fixed rate, costs are relatively predictable
Tax benefitsGenerally, there are no tax benefitsMortgage interest and property tax deductions may be possible
Long-term financial impactNo equity is built while rentingMonthly payments contribute to building equity
CustomizationRenters are usually limited to what renovations they can performHomeowners are typically free to modify and decorate their homes as they see fit
Insurance costsRenters insurance is generally cheaper than homeowners insuranceWhile more expensive, homeowners insurance is more comprehensive
Market riskRental prices are not directly (or immediately) affected by market downturnsIf property value declines sufficiently, homeowners are at risk of negative equity (i.e., owing more to the bank than their home is worth)

What do you value?

Without a crystal ball, there's no way to tell where the property market is going. And as detailed above, there are good reasons supporting both renting and buying.

As a result, the decision about which to choose ultimately comes down to what you value. And it’s not just finances you need to consider.

You should consider renting if…

  • You want the flexibility to move without the hassle of selling your property
  • You want to avoid the risk of a depreciating home value
  • You want to avoid maintenance costs
  • You want cash available for other investment opportunities
  • You expect interest rates to fall substantially
  • You expect property values to drop significantly
  • You haven’t saved a down payment
  • You can’t commit to maintaining the higher monthly obligation of a mortgage
  • You don’t plan to live in the home long

You should consider buying if…

  • You expect property values to appreciate considerably
  • You want to build equity
  • You value the idea of owning your own home
  • You desire the stability of fixed monthly payments (rent can increase unpredictably)
  • You want to lock in current rates before they go even higher
  • You plan to remain in the home for a long time

Where do you fall?

Do you value the flexibility of renting or the stability of ownership? Do you want to own a potentially appreciating asset, or do you believe the housing market is due for a correction? Do you expect interest rates to remain above 5%, or are we overdue for a Fed pivot?

Unfortunately, there’s no one-size-fits-all answer. You need to weigh the pros and cons of both choices to understand what option is best for you.

If you need clarity, consider speaking with a financial advisor to understand each potential decision's implications fully.

After all, for most Americans, this will be the biggest purchase (or rental) of their entire life.