Rising home values and higher mortgage rates have dulled the appeal of buying but also reached a point where savings on monthly costs would shrink, or even evaporate, for some renters who take the plunge into homeownership.
The higher price tags have eroded some of the financial incentive to buy a home versus renting one for most buyers, a
Zillow
analysis of monthly costs provided to Barron’s shows. And the math is even worse for first-time buyers.
Buyers purchasing the typical home with a 20% down payment have seen their savings shrink compared with renting since 2019, while those paying with a 5% down payment are facing monthly mortgage costs that are broadly higher than rent prices. The Zillow data used the average 30-year fixed mortgage rate and two Zillow indexes, one measuring the typical home value and the other measuring the typical rent, to determine basic monthly payments.
This shift is unwelcome for first-time buyers, who data suggest typically make smaller down payments. While the typical repeat home buyer’s down payment in 2022 was 17%, first-time buyers typically put down only 6%, according to National Association of Realtors data.
In July 2019, a home buyer who put 20% down and had the average mortgage rate stood to save roughly $700 in monthly costs compared with the typical rent price, the Zillow data show. By July 2023, a buyer’s savings relative to renting was just $237.
Those thin monthly savings turn into losses when a purchase is made with a smaller down payment. In 2023, someone buying the typical home at the average mortgage rate with 5% down would pay $330 more a month to do so compared with the typical rent, according to Zillow data. In 2019, even these buyers stood to save hundreds a month relative to rent costs.
The difference in monthly costs could help explain why some renters are hesitant to make the leap to homeownership. A record share of renters who responded to
Fannie Mae’s
July housing market sentiment survey said they would rent instead of buying if they moved.
“Some of those folks who are right on the cusp of that decision—at that age range where they might be thinking of buying their first home—might be running these numbers and say, ‘maybe homeownership is not right for us right now,’” says Zillow senior economist Jeff Tucker.
First-time buyers have had a hard run of the housing market in recent years: The one-two punch of rising home prices and mortgage rates has pushed homeownership broadly out of reach for them, National Association of Realtors affordability index data published earlier this week show.
Indeed, the cohort represented 26% of all transactions in 2022, the National Association of Realtors found—the lowest annual share on record. Monthly data shows little improvement, with the group representing 27% of all sales in June, the most recent month for which data is available.
Leading indicators offer little reason for optimism: mortgage rates rose to a level just below 7% last week, according to
Freddie Mac,
while the Mortgage Bankers Association’s index tracking home purchase loan applications has fallen for four straight weeks. “Homebuyers continue to struggle with low for-sale inventory and elevated mortgage rates,” Joel Kan, the trade group’s deputy chief economist, said in a statement.
Higher rates have reduced the number of homes on the market, pushing prices up. Sales are broadly down as a result, data suggest: existing-home sales have been tepid this year, National Association of Realtors data show.
This isn’t to say homeownership has lost its broader appeal: Monthly costs are only a sliver of the factors buyers consider when beginning their hunt, but act as a simple starting point for the purposes of comparison. As evidenced by recent year-over-year gains in new home sales and home builder commentary, there’s still plenty of demand for houses, particularly when buyers feel like they’re getting a good value for the price.
While the rent versus buy equation has shifted, other financial perks of homeownership still stand: While renters’ monthly payments leave their wallets forever, homeowners’ monthly payments help build equity that can act as a cushion down the road. The tax benefits of buying a home, though lessened by the Tax Cuts and Jobs Act, still provide some incentive.
And mortgage payments offer relative stability compared with renting, since the relatively short duration of leases means renters’ monthly payments are unpredictable beyond their current lease term. “That sort of stability and hedge against inflation [and] rising rents is still really appealing to people,” says Zillow’s Tucker.
The individual decision to purchase a home isn’t a purely rational one based on cost analysis, says Jay Lybik,
CoStar Group’s
national director of multifamily analytics. Life events, such as getting married, tend to have a more appreciable impact on consumers’ decision to buy a home than how monthly costs compare to rent, Lybik says.
Write to Shaina Mishkin at [email protected]
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