Renting is Cheaper than Buying a Home in 46 out of the 50 biggest U.S. Metros

TL;DR

• The only four (4) major metros where buying is more affordable than renting are Detroit, Philadelphia, Cleveland, and Houston.
• Buying a home in the Bay Area costs twice as much as renting.
• On average, owning a home costs 25% more per month than renting, nationwide. 
• Purchasing a home becomes more affordable with reduced mortgage rates. If rates dropped to 5%, the cost of owning a home would only be 10% higher than that of renting.

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The Most Affordable Cities in the US to Buy vs Rent a Home

According to recent data, Detroit tops the list of cities where it's more cost-effective to buy a home than to rent, with a 24% discount in percentage terms compared to the 50 most populous metros. Philadelphia ranks second with a 7% ownership discount, followed by Cleveland with a 4% discount and Houston with a 1% discount.

Detroit has 80% of properties more affordable to buy than rent, the highest percentage in the US. Philadelphia is second with 59%, followed by Cleveland at 57% and Houston at 52%. The nationwide average is only 19%.

Nationwide, the typical home costs 25% more to buy than rent

Based on a Redfin analysis of single-family homes, condos/co-ops, and townhouses in the 50 most populous U.S. metros, owning a home is more expensive than renting in most areas. To estimate monthly housing payments, the Redfin Estimate of the homes' value in March and a 6.5% mortgage interest rate – the average rate in March. Conversely, the Redfin Rental Estimate was used to estimate monthly rent payments. Redfin's calculations assumed a 5% down payment, a homeowner's insurance rate equal to 0.5% of the purchase price, and a 1.25% annual property-tax rate in the absence of tax records.

Redfin Deputy Chief Economist Taylor Marr shared the following insights:

• Buying a home often makes more financial sense than renting if you can afford a down payment and monthly mortgage because you’re building equity.
• When you own your home, your home pays you; when you rent, you and your home pay your landlord.
• Buying isn’t a feasible option for everyone.
• Some people move around a lot, so renting might make more sense because they won’t be in their homes long enough to build equity.
• Many others simply don’t have the money for a down payment—a situation that has become increasingly common due to rising mortgage rates and elevated home prices.
• In Detroit, Philadelphia, Cleveland, and Houston, it’s cheaper to buy a house than rent one because home values in those areas have stagnated relative to the country as a whole.
• When house hunters can’t build a lot of equity, they have less of an incentive to pay a premium to own.
• While these markets don’t experience huge booms, they also don’t experience huge busts that are currently underway in much of the U.S.
• When more people can afford to buy homes—even if they’re not building a ton of equity—there is also more wealth equality.

Lower mortgage rates could make owning a home in the US more affordable than renting.

Cities like Detroit, Philadelphia, Cleveland, and Houston stand out as exceptions where buying a home is actually more affordable than renting. However, mortgage rates would need to decrease considerably in order for purchasing a home to be a more economical option than renting everywhere else.

If the 30-year-fixed mortgage rate dropped to 5%, the median estimated monthly mortgage payment for homebuyers would be $2,993, or 10% higher than the $2,716 median estimated monthly rent. That’s significantly lower than today’s 25% homeownership premium, with an estimated monthly mortgage payment of $3,385 and an estimated rent of $2,715.

If the 30-year-fixed mortgage rate were to decrease to 5%, homebuyers' median estimated monthly mortgage payment would be $2,993, which is 10% higher than the median estimated monthly rent of $2,716. This is significantly lower than the current 25% homeownership premium, which shows an estimated monthly mortgage payment of $3,385 and an estimated rent of $2,715.

In interest rates were to decrease to 4%, the estimated premium would go down to 1%. Additionally, if the interest rates decrease further to 3%, it would make buying a home 7% cheaper than renting. It's essential to keep in mind that the calculations are based on estimated home values from March, and prices and rents are subject to significant changes should mortgage rates decrease.

While mortgage rates are expected to fall below 6% by the end of the year, it is unlikely that they will return to the 3% range anytime soon. Fannie Mae conducted a national survey. They found that 22% of respondents in April think mortgage rates will fall - an increase of 10% from the prior month.

Although renters are not able to build home equity, they do avoid the significant expenses that come with home upkeep and selling. Additionally, renters may opt to invest the funds they would have otherwise spent on homeownership into other profitable investments.

Home buying is more expensive than renting in most of the country because it comes with perks: wealth-building opportunities, fixed monthly costs, and tax benefits, to name a few. The premium is highest on the West Coast because that’s where homebuyers expect the wealth-building potential to be largest based on historical evidence.

The increase in mortgage rates has made homeownership more expensive, especially in costly coastal markets like the Bay Area and Seattle. This has widened the gap between buyers and renters, making homeownership out of reach for many people.

The silver lining is that due to the exorbitant costs of these areas, partly because of higher mortgage rates and the pandemic-induced surge in home prices, home prices in San Jose and Oakland are dropping faster than almost any other region in the U.S. Median sale prices have declined by approximately 10% YoY in March, which is three times the nationwide drop. Though rents have decreased in some expensive coastal markets, they have not fallen as sharply as housing prices.

Pandemic Boomtowns: No Homes Cheaper to Buy than Rent

In cities experiencing a surge in population due to the pandemic, there are virtually no homes that are more affordable to buy than to rent.

It's no secret that the Bay Area has incredibly expensive housing, with almost no homes being more affordable to buy than rent. However, this trend has now extended to other previously affordable cities like Sacramento, CA, Las Vegas, Phoenix, and Austin, TX. Thanks to the pandemic, remote work has allowed people to relocate, causing an influx of people and a significant rise in housing prices in these areas.

In Sacramento, Las Vegas, Phoenix, and Austin, it is currently more cost-effective to rent a home than to buy one, with the percentage of homes cheaper to buy less than 5%. These cities are also among the most popular destinations for people moving during the pandemic, according to Redfin's list.

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“Housing affordability is an issue in Las Vegas. During the pandemic home buying boom, we had a lot of people moving in from high-priced coastal areas. That caused home prices to soar faster than wages, creating a disadvantage for locals looking to buy,” said local Redfin Premier real estate agent Shay Stein. “The good news is that because the market has slowed, sellers are willing to accept offers from buyers who use FHA loans and down-payment assistance programs, and some are even throwing in money to help with mortgage-rate buydowns. All of that was unheard of during the 2021 home buying frenzy.”

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​​Metro-Level Summary: March 2023, 50 Most Populous U.S. Metros

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