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Generations of consumers have embraced homeownership as part of the American Dream. But these days, that seems more like a pipe dream.
“Housing is becoming a luxury,” said Christopher Mayer, an economist at Columbia University.
What are the advantages? It’s the perfect time to rent. The rising cost of homeownership has upended the long-standing relationship between rent and ownership. Rent is now much cheaper in most of the country’s largest cities.
The median sales price for existing homes rose more than 40% from early 2020 to mid-2022, with a seasonal peak of just over $400,000, according to the National Association of Realtors.
Prices are still rising: The median sales price for existing homes was 4.4% higher in December 2023 than in December 2022.
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Meanwhile, mortgage interest rates are now double what they were at the start of 2022, at 6.8% as of mid-February, compared to just over 3% at the start of 2022.
Combining these two trends creates some scary mathematics.
Rising mortgage rates were supposed to push home prices down.they didn’t
Imagine you bought a $400,000 home and made a 20% down payment.
At a 3.2% interest rate, your monthly principal and interest on a 30-year mortgage will total $1,383, according to Bankrate’s mortgage calculator.
At 6.8%, the same mortgage would cost $2,086.
“This is the most affordable housing market in recent memory,” said Darryl Fairweather, chief economist at Redfin.
Rising interest rates have slowed home price growth, leading to slight declines in some months. However, it remains a seller’s market. Here’s why:
- Developers are not building enough new housing to meet demand.
- The coronavirus pandemic and remote work boom further increased demand as workers sought larger housing.
- Homeowners with historically low mortgage rates are reluctant to sell.
“For consumers, this is kind of a perfect storm,” Meyer said. “A ‘perfect storm’ in a bad way.”
Homeownership has long been considered a rite of passage.
The exorbitant cost of purchasing a home is changing conventional wisdom about the benefits of homeownership.
Americans have long viewed homeownership as a rite of passage. Approximately two-thirds of Americans own a home. Many households consider their home to be their primary asset.
However, these days, when it comes to deciding whether to rent or buy, the renter has an advantage.
There are many factors involved in the equation.
How long prospective buyers are likely to live in the home, how much money they have available for a down payment, how much interest they will pay on the mortgage, and whether the home’s value is likely to appreciate Consider.
Potential renters will take into account current rental rates, whether rents are likely to increase, and the cost of rental insurance.
In a typical housing market, buying a home may make sense for someone who expects to live in the home for, say, five years. That’s enough time to pay off your mortgage, increase your home’s equity, and increase its market value. The theory goes that you’re more likely to make a profit if you sell your home after five or 10 years.
That formula may still work. However, with home prices so high, many potential buyers cannot afford to make the investment.
“For many people, it’s not a matter of choice,” Meyer says.
In today’s housing market, renting is becoming increasingly attractive.
A 2023 analysis by Realtor.com found that renting is cheaper than buying in 47 of the 50 largest metropolitan areas.
Our analysis shows that in Austin, Texas, the monthly cost to purchase a starter home was $3,946. That’s more than double his $1,670 monthly rental fee. Monthly savings: $2,276.
Only three metro areas remain affordable, according to the report. Memphis, Tennessee. and Birmingham, Alabama.
Housing experts serve everyone from owners to renters.
Elizabeth Renter, NerdWallet’s senior writer and housing price researcher, looked at the numbers for upcoming moves in downtown Durham, North Carolina. She decided to rent it.
According to Realtor.com’s Rent or Buy Calculator, the average home price in downtown Durham is $550,000. Buying a home at that price would cost you about $2,868 in monthly principal and interest, assuming a 20% down payment and 6.8% interest. Rent in downtown Durham averages about $1,700 per month. Renting is a cheaper option.
“I’ve never lived in Durham,” she said. “I don’t know if I want to stay in Durham long-term. So I’m not ready to buy a house in Durham.”
Mr. Renter is selling his home, a Victorian fixer-upper in Kansas. She’s tired of fixing her things.
“When something breaks, I look forward to calling the landlord,” she joked.
In the United States, rents are rising as well as home prices, but not at the same pace.
According to NerdWallet’s analysis, the national average rent was $1,958 in January, up just $1 from December.
NerdWallet reports that rents are currently 29% higher than they were before the pandemic.
But economists don’t expect rents to rise significantly in the coming months. One reason is the rapid increase in the construction of rental housing.
“Rent prices have been depressed in recent months,” said Daniel Hale, chief economist at Realtor.com. “So for those who live in rentals, you can take advantage of the fact that your rent may go down. Perhaps it will remain fixed.”
Will the housing market ever go down?
Economists say homeownership won’t become more affordable unless interest rates, home prices, or both plummet.
Economic forecasts suggest mortgage rates could ease later this year following a series of predicted rate cuts from the Federal Reserve.
“There’s almost complete consensus that interest rates are going to go down,” said Matt Vernon, head of consumer finance at Bank of America.
Home prices are likely to remain high, primarily due to simple supply and demand issues. In other words, there are few options. Existing home sales bottomed out in 2023 as homeowners across the country refused to make concessions.
Many homeowners refinanced their mortgages at historically low interest rates before and during the pandemic. Currently, interest rates for most mortgage holders are below 5%. Housing wealth is near historic highs.
“Unless there’s a need to sell, it’s just going to stay put,” said Odeta Kusi, deputy chief economist at First American Financial Corp.
Rent or buy?The affordability gap is closing in the U.S.
According to Kushi, about two-fifths of American homes are owned free and clear, free from mortgages.
“The nuance there is that many of those homes are owned by baby boomers,” she says. “Will they move at this point? Maybe not.”
Daniel de Visse covers personal finance for USA Today.
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