Despite the fact that home prices have risen by double-digits over the past couple years, buying might still beat renting because monthly rents are also climbing at a rapid clip.
Lately, there have been numerous reports and frightening new stories about rising rents causing affordability concerns, with former HUD secretary Shaun Donovan referring to it as the worst the country has ever known.
As I wrote last week, we appear to be in an affordability crisis, not a housing bubble. In other words, both home prices and rents are high. It’s not just home prices that are ballooning out of control.
One of the reasons rents are rising is because of all the foreclosures that occurred during the crisis. Many of these former homeowners that were displaced are now renting, whether voluntary or not.
There might be a newfound distaste for homeownership after what went down during the housing bust, while others might simply need more time to pass before they can get back in the game thanks to foreclosure waiting periods and the like.
Mortgage Payment-to-Rent Ratio Lowest in Decades
The problem is that rents are rising and incomes have been largely flat, which means renters are spending more and more of their hard-earned paychecks on rent as landlords demand more each month.
Does that mean it might make more sense to buy a home or condo instead, given the low mortgage rates still on offer, combined with a payment that remains fixed for the life of the loan?
Well, Freddie Mac reported today that the monthly mortgage payment-to-rent ratio for the U.S. is around the lowest it has been in three and a half decades. You can thank low interest rates for that.
Freddie Mac expects the 30-year fixed to stay flat at 4.2% in the third quarter before rising to just 4.3% in the fourth quarter, before eventually rising to 5% a year later.
Home prices have also yet to recover to pre-crisis highs, whereas rents have continued to march higher and higher.
At the same time, the improved job market is leading to higher household formation, which is increasing rental demand as low vacancy rates already put pressure on rents.
That trend should also push home prices higher over time, so if a renter were to escape the rent trap and secure a fixed-rate mortgage today, they could potentially make out pretty well, even if they missed a couple years of double-digit growth.
Sure, there’s more to buying vs. renting than just rents and affordability, but it does make the decision to buy today a bit more compelling.
Additionally, inflation can make mortgage payments even cheaper in the future as dollars become worth less and the amount you pay remains the same. If you continue to rent, you could be subject to higher and higher rents as dollars won’t go as far a decade from now.
Yes, I’ve been slightly negative on home buying lately, but mainly because I’ve been seeing a lot of questionable stuff on the market, namely flips that are selling for nearly 100% more just a few months later.
Today’s buyer simply has to be more careful when navigating the inventory of for-sale properties.
There’s still plenty of potential for upside, and rent vs. buy ratios are still favorable, but it’s also clear that home price growth is slowing and even declining in some areas.
However, if you can lock in a low interest rate for life and snag a reasonable price for a home, buying could still prove the much wiser move.
Read more: Rent vs. buy calculator