There are Only Four Cities Where Buying Is Cheaper Than Renting
Rents exceed mortgage payments in Detroit, Philadelphia, Cleveland and Houston.
It is hard to believe in this era of rising mortgage rates but there are actually four cities where buying makes better sense than renting.
In Detroit, Philadelphia, Cleveland and Houston, homeownership still makes sense as monthly rental payments are more than monthly mortgages, according to Redfin.
For example, the typical home in Detroit is 24% less expensive to buy than rent there due to the median estimated monthly mortgage payment running $1,296 versus the estimated rent being $1,697. In fact, 80% of properties are less expensive to buy than rent.
In Philadelphia, 59% of its properties are cheaper to buy than rent, followed by Cleveland where 57% are less costly and Houston where the number of properties that run less is 52%.
Elsewhere in the nation, a typical home costs 25% more to buy than rent with an estimated monthly mortgage payment of $3,385, based on a 6.5% mortgage interest rate, compared to rent of $2,715.
Buying remains out of the reach of many in the continuing volatile housing market, says Taylor Marr, Redfin’s Deputy Chief Economist. “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,” he said.
And where renting may prove definitely more prudent is in the San Francisco Bay Area. For example, in San Jose, a typical home is 165% more expensive to buy than rent—the biggest premium in percentage terms among all the 50 metros Redfin surveyed. There a monthly mortgage payment is $11,049 versus the rent of $4,176. Also, in the high-priced category are other West Coast destinations of San Francisco, Oakland, Anaheim and Seattle.
Even in cities once considered affordable such as Sacramento, Las Vegas, Phoenix and Austin, prices rose dramatically during the pandemic and there are no homes that are cheaper to buy than rent. Part of the reason is that buyers came from high-priced coastal areas to the less expensive locations such as Las Vegas, said Shay Stein, with Redfin Premier in Henderson, N.V.
Mortgage rates would need to fall substantially for buying to become viable again in most markets. If rates fell even slightly or by 1%, the two monthly costs would edge closer. Mortgages would be $2,993 or 10% more than the $2,716 estimated monthly rate. In a single year, the additional cost to homeowners would be $277 a month or $3,324 a year.
This isn’t out of the realm of possibilities if the Federal Reserve succeeds in cutting inflation. Mortgage rates could then fall too, and potential buyers might be able to put together a downpayment and cut living costs to afford a home. However, nobody likes the pressure of watching every penny and becoming house poor. Marr said, “I wouldn’t encourage people to squeeze their budgets in order to buy a home when prices are falling, we’re teetering on a recession.” Marr added that in the current economic climate, it makes sense to be a bit more conservative in what’s spent.