With mortgage rates high, renting is less expensive than buying

The cost of housing is generally expensive across the board for Americans, whether you’re a renter or an aspiring homeowner.

While both home prices and rent have outpaced wage growth in most areas, renting can be the smarter financial choice in many markets, said Susan M. Wachter, a professor of real estate and finance at The Wharton School of the University of Pennsylvania. 

“The cost of homeownership versus renting has been [making it] daunting to become a homeowner. It’s less expensive to be a renter in most markets in the U.S.,” Wachter recently told CNBC.

More from Personal Finance:
A flood insurance quirk makes basements a bad place to keep your stuff
Here’s how the IRS is targeting top earners for an audit
Biden to forgive $1.2 billion in student debt for over 150,000 borrowers

There is no one-size-fits-all answer when you’re deciding whether to buy or rent. What’s right for you will depend on factors such as monthly income, outstanding debt balances and how long you plan to remain in that home, said Jacob Channel, a senior economist at LendingTree.

It’s generally cheaper to rent than own in the country’s 50 largest metropolitan areas, according to a recent study by LendingTree. Between median rent costs and median homeowner costs for those with mortgages, tenants came out ahead by $563 per month in 2022.

Owning a home can help you build wealth, and after you finish paying the mortgage, owning a place will probably be cheaper than a rental, Channel said.

You also have more freedom as a homeowner that renters may not have, such as the option to install new appliances, paint or do even small home-improvement projects including mounting a TV to a wall, Channel explained.

“If you want to paint your walls neon pink, go for it,” he said.

The costs of owning a home can be more stable compared to rent prices. Your mortgages may be fixed for up to 30 years, while the rent price for a unit could increase with each lease renewal.

Homeowners may also have more protections and options than renters do if they find themselves struggling financially.

Yet, the upfront cost of a down payment is high for most Americans, Wachter said.

“Stability is clearly an advantage to a homeowner, but the cost and the down payment can make it unaffordable,” she said. 

The median down payment for single-family homes and condominiums in the U.S. was $35,050 in the third quarter of 2023, according to ATTOM, a property data site. This was a 12.2% increase from $31,250 in the prior quarter.

House prices grew 7% in 2023, far exceeding both wage growth and rents, Wachter said.

Mortgage rates also remain high for potential homebuyers, spiking back to 7.06% from 6.87%. The interest rate affects the monthly cost of a home, which can make or break affordability for a homebuyer.

The median asking rent price rose to $1,964 in January, up 1.1% from a year ago, according to real estate site Redfin. While rent prices are slightly higher, growth is slowly declining from record highs during the Covid-19 pandemic.

When you compare upfront costs, renting is likely to be less expensive than buying a house, Channel said.

The total immediate cost to rent a unit may include a security deposit and a potential broker’s fee, which is still a lot less money compared to a down payment.

Even if you have enough money to buy a house, there are incentives to renting. There are millionaires in the U.S. who can afford to buy a property but choose to rent, Channel said. Your landlord is responsible for physical repairs and infrastructural upkeep of the apartment, as well as making sure to pay the property taxes.

While rents have not increased at the same rate as home prices, rent costs have outpaced wages, making it more difficult for renters to save for a down payment, Wachter said.

“There are renters who are simply discouraged from saving because it has become so difficult in some markets to become a homeowner,” she said.

In fact, rent costs are so high that half of renters are cost burdened, meaning they spend more than 30% of their monthly income on rent, according to recent analysis by the Joint Center for Housing Studies at Harvard University. 

Some indicators show that rent prices are stabilizing due to vacancy rates, which came back to 6.6% in the fourth quarter of 2023, and remained flat from the prior quarter at the highest level since 2021, according to the Federal Reserve. Vacancy rates have been improving in recent years as more newly built apartment units come on the market.

Don’t miss these stories from CNBC PRO: