Buy vs Rent 2024

May 30, 2023

Buy vs Rent in 2023

Redfin’s latest report found that in only 4 major US metros , is it better to buy than rent. Those cities were Houston, Detroit, Philadelphia and Cleveland. The rest? Better to rent.

Yes, mortgage rates have climbed and housing supply has cratered, especially in the single family market pushing house prices mercilessly high in some cities.

The stats will reassure landlords that committing to their rental portfolio was a great investment decision. That doesn’t mean however that they can neglect how they manage and grow their revenues.

Rental Apartment Vacancy rates last 30 years. Screenshot courtesy of NMHC.org.

Rent Price Progression last 20 years. Screenshot courtesy of NMHC.org.

Home buyers are always asking “when will home prices fall?” Given the economy and housing demand might rebound in 2024 when mortgage rates ease, we may not see home prices fall until more housing supply is created.

And permits and starts are heading downward which doesn’t bode well for either the home or rental supply in the next 5 years.

In California’s Bay Area, it’s twice as expensive to buy than rent. San Jose, San Francisco, Oakland, Anaheim, Los Angeles, San Diego, and Sacramento dominate the top 10 toughest cities for buying a home. In California, perennial land of the American dream of homeownership, renting looks like it may always be the preferred choice from now on.

Renting vs Buying Across the US

Across the US, it’s estimated to be on average 20 to 25% cheaper to rent. So on the buy vs rent question, renting is the practical option. And we wonder how many landlords and homeowners will end up in the ranks of renters this year and next. They face mortgage rate refinance increases of 400% to 500%.

With the economy looking strong despite the slowdown by high rates, the FED is likely to keep rates up for the rest of 2023 at least, although we may see relief after the summer vacation season.

Redfin Study on Homeownership Premium

The Redfin study showed those cities which Americans fled to during the pandemic have very limited housing available and that’s pushed rental rates up.

Does it every make sense to buy a home? If you have the down payment and can handle the 8% variable rate mortgage for a couple years, then renegotiate when rates fall in 2024, then it might be a workable decision.

That rests on the assumption that the housing market will return. Realtor.com predicts a modest, consistent growth of 5.4% over the next 5 years. Redfin in its recent report states that if mortgage rates dropped 3%, homes would cost only 10% more than renting.

Rent vs Buy Differential as Mortgage Rates Drop. Screenshot courtesy of Redfin.

Is there any hope for rate weary homebuyers? It’s not a promising outlook given investors are on the hunt too for homes to buy and rent out. The fact is, demand for rentals is intense and there is a big focus on the best cities to buy rentals and too, the best types of rental properties. Desperate people facing rates they can’t afford and homelessness means becoming a landlord has never looked so good (unless you’re in a rent control state).

Have a closer look at those smaller cities which still have housing stock available as you’ll find a more sensible, affordable price. They’ll hold their value given demand especially as mortgage rates drop, and your own refinanced rate will be lower too.

Gen Z’s and Millennials who want to invest in a home might have to realize that in most big cities, the value proposition will never be there, short of a complete housing market collapse. If you want to own, a migration might be in your future.