With rents continuing to climb and mortgage rates staying low, many renters find themselves gazing over the homeownership fence and wondering if the grass really is greener.
With rents continuing to climb and interest rates staying low, many renters find themselves gazing over the homeownership fence and wondering if the grass really is greener. Leaving aside, for the moment, the difficulties of saving for a down payment, let’s focus on the monthly expenses of owning a home: It turns out that renters currently paying the median rent in many markets could afford to buy a higher-quality property than the typical (read: median–valued) home without increasing their monthly expenses.
In March, the median rent nationally was $1,416, according to the Zillow Rent Index. That amount would cover monthly expenses for a home that cost up to $289,500 – which is 47.3 percent higher than the median U.S. home value ($196,500 as of March). These homeowners’ expenses assume a 20 percent down payment and include the mortgage payment, property taxes, homeowners insurance, and steady maintenance and renovation expenses[1]. More than half – 57 percent – of the available for-sale inventory nationally is listed for under $289,500.
That calculation is very sensitive to fluctuating mortgage rates, which have fallen dramatically since October 2016 but spiked after the presidential election.
Prices also vary considerably across markets. In some areas, low inventory and growth in high-earning jobs have pushed median home values beyond prerecession peaks, outpacing rent and incomes by a significant margin. In these cities, including San Francisco, New York and Seattle, the home value that would be covered by median rent payments is much lower than the market median. In San Francisco, for example, the rent-covered home value has been lower than the market median for many years and is currently almost 26 percent lower. In Seattle, the median home value exceeded what could be covered by a median rent in April 2015, and the median value home is now 18 percent higher than what a median rent payment would cover. That means there’s far less for-sale inventory for renters looking to buy and keep their monthly expenses constant. In San Francisco, only 23 percent of available inventory is valued at less than the rent-covered home value. In Seattle, it’s only 26 percent.
In areas where land is more plentiful and population growth more modest, the rental and homeownership markets are more in-line. Such is the case in places like Detroit, Cleveland and Milwaukee, where the rent-covered home value exceeds the market median by 293, 209, and 120 percent, respectively. In these cities, a renter could afford a much higher-quality home than is typical in the market without increasing her monthly expenses. It’s also much easier to find available for-sale inventory at or below that value.
Related:
[1] We assume a 30-year fixed-rate mortgage, prevailing interest rates for healthy credit scores (PMMS), and a 20 percent down payment. For property taxes, we assume a rate of 1 percent of total home value annually. Note that property tax rates vary widely even within the same city limits. Homeowners insurance amounts are assumed to be 0.5 percent of total home value annual, and we assume the homeowner spends 1 percent of total home value annually on maintenance and renovation.
