Unless you're lucky enough to live in four select cities, it's cheaper to rent than buy in most parts of the US, according to a new housing analysis.
According to real estate agency Redfin's analysis of the 50 most popular metropolitan areas, the monthly mortgage cost of a house in Detroit, Philadelphia, Cleveland and Houston is less than the monthly rent. These were also the only places where buying more than 50% of the houses in each market was cheaper than renting.
In every other major city — from San Jose, California to Pittsburgh — renting is cheaper than buying, the report says, a blow to potential homebuyers.
Rising home prices, elevated interest rates and still high inflation have impacted affordability for buyers across the US. Still, these few markets somehow weathered the storm.
“It's easier to build there,” Redfin chief economist Daryl Fairweather told Yahoo Finance of the four cities. “[And] House prices have never really risen in these areas during the pandemic, at least not as much as in the rest of the country.”
“They didn't have big swings in price as mortgage rates went up,” she added. “It hasn't really improved housing affordability like it has in other parts of the country.”
Redfin's calculations included a 6.5% mortgage rate and 5% down payment, a home insurance rate of 0.5% of the purchase price, and an annual property tax rate of 1.25% when tax records were not available.
Where it is cheaper to buy
According to Redfin, Detroit was by far the cheapest city to buy a home.
Redfin estimated that the average monthly mortgage payment in Detroit in March was $1,296 compared to a monthly rent of $1,697, making it 24% cheaper to buy a typical home there. That was the largest percentage discount among the 50 most populous metropolitan areas.
Next was Philadelphia with a 7% property discount, then Cleveland with a 4% discount and Houston with a 1% discount.
Statewide, however, a typical home costs 25% more to buy than it does to rent, the company's analysis found.
According to Taylor Marr, Redfin's deputy chief economist, these areas didn't see a price surge because during the pandemic newcomers flooded the market, as has happened in boomtowns, where house prices have soared.
“Real estate values in Cleveland and Detroit are flat compared to pandemic boomtowns like Phoenix and Miami, so they're not seeing a big boom,” Marr wrote in the report. “But that also means they won't experience the huge economic downturns that are happening across much of the US right now.”
As a result, 80% of Detroit's real estate is cheaper to buy than rent. That proportion was 59% in Philadelphia, 57% in Cleveland, and 52% in Houston. Nationwide, only 19% of the housing stock is cheaper to buy than to rent.
“It's a double-edged sword, though,” Marr added. “If home seekers can't accumulate a lot of equity, they have less incentive to pay a premium to own it.”
where it is more expensive
In contrast, real estate prices have risen sharply in most of the country's major cities, making real estate unaffordable.
According to Redfin, buying a typical home in San Jose is 165% more expensive than renting it, which is the highest percentage premium among the 50 metropolitan areas. Residents there had to pay an average monthly mortgage payment of $11,049 compared to an average monthly rent of $4,176.
San Francisco had the second highest ownership premium at 139%, followed by Oakland, California (99% premium); Anaheim, California (91% premium); and Seattle (88% premium).
That means there are virtually no houses in these cities that are cheaper to buy than rent, Redfin noted.
Although property prices have fallen recently in some of these markets, the declines have not been enough to significantly improve affordability.
“California has seen a recent decline in real estate values due to high interest rates, but housing in California is still really unaffordable,” Fairweather said.
“We need more supply”
Though higher mortgage rates have made home affordability more difficult, the real root problem in much of the country is a lack of inventory, Fairweather said.
The available inventory of unsold single-family homes this week rose 0.7% to 436,284 homes, according to a separate survey by real estate analytics firm Altos Research. Compared to last year, there are currently 16% more houses on the market. At the beginning of the year there were 70% more apartments than in the previous year.
At this rate, “it shows us that by mid-July we will have negative year-over-year inventory growth,” Altos President Mike Simonsen wrote in a blog this week.
The same lack of supply has kept home prices high across the US. The median price for a single family home this week was $450,000, unchanged from last week and unchanged from a year ago. Recent increases in mortgage rates have made this price more expensive.
“We should have more supply,” Fairweather said. “It's sort of the only real long-term solution to improving affordability, because if market rates go down again, prices will immediately go back up.”
Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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