It’s an adage nearly as old as housing itself; buying a home makes more financial sense than renting.

In addition to being the quintessential American Dream for many people, owning your own home has historically been one of the best ways to build wealth over time. In a report released this month, a 2020 U.S. Census study [1] showed that as of 2019, 27.8% of a household’s net worth came from the equity in their own home.

But in a time of economic uncertainty – with home prices and interest rates rising and the possibility of a recession looming – it’s worth taking a moment to reconsider that time-honored advice.

The Age-Old Choice

When people decide whether to buy or rent, the first thing they typically consider is the ratio between the cost of a monthly mortgage versus rent. If that ratio is low, buying is better than renting. But if that ratio is high, renting is often more attractive than buying.

A recent report from Zillow [2] shows that housing affordability hit a 15-year low in June, with mortgage payments now higher than rent in 45 of the 50 largest metropolitan regions of the United States. As a result, a mortgage is less affordable than at any time since 2007.

The report cites the chief culprit as the widening gap between incomes and mortgage costs. Based on the company’s data from April, monthly payments take up 28% of homeowners’ monthly income – just below the 30% threshold for what is considered a cost burden.

In recent weeks, the Federal Reserve has increased interest rates in an effort to slow the nation’s soaring inflation. While this move by the Fed doesn’t directly change mortgage rates, mortgage lenders often base their rates on government actions. Yet as NPR reports [3], mortgage prices have yet to feel the impact.

Rents are also on the rise – just not as quickly. The real-estate brokerage company Redfin reported [4] in early June that the median monthly rent surpassed $2,000 in May and rose 15.2 percent over the last year.

Despite these ballooning rent prices, mortgage payments are still more expensive in most of the U.S. According to the Zillow report, a typical rent payment in May ran higher than a mortgage payment in only five of the country’s 50 largest metros. Compare that with 2019, when rent was more expensive than a mortgage payment in 28 of those 50 metros.

This data led Redfin deputy chief economist Taylor Marr to indicate [5] that renting was a more affordable option than taking on a mortgage. “While renting has become more expensive, it is now more attractive than buying for many Americans this year as mortgage payments have surpassed rents on many homes,” Marr said.

Adding It All Up

Ultimately, the decision to buy or rent comes down to individual preference. For instance, if you’re only living somewhere temporarily, it generally makes more sense to rent. And there are attendant costs of homeownership to consider – such as down payments and closing costs. Location is another all-important factor. According to the 2022 Rental Affordability Report [6] from ATTOM Data Solutions, the combination of rising prices and low inventory make it cheaper to rent than buy in about 42% of the counties in the U.S. This includes 21 of the 25 most populated counties in the country. So, if you live in one of those areas, renting may make more sense than buying.

While there are still certain advantages to owning your own home, it’s not the right choice for everyone and every situation. You’ll want to carefully weigh the pros and cons of buying compared to renting to see what makes sense for your situation.

At Circle Squared, we help our clients understand all aspects of investments – to ensure that every decision is guided by the most recent and relevant industry information. So if you have questions about what real estate decisions make the most sense for your unique situation, reach out today. We’re here to help.

The information contained herein is provided for educational purposes only, represents only a summary of topics discussed, and does not constitute personalized investment advice or recommendations. The views expressed herein are the opinions of the authors which may not come to pass and are subject to change without notice. Certain information contained herein is derived from third parties, and no guarantee is made as to the accuracy or completeness of such information, which has not been independently verified. Past performance is not indicative of future results. All investing involves risk, including the risk of loss of principal.

[1] (United States Census, The Wealth of Households: 2019)
[2] (Zillow, Housing Affordability Hits 15-Year Low as Prices, Mortgage Rates Rise, May 2022)
[3] (NPR, Housing prices soar with rising inflation, June 2022)
[4] (Redfin, Rental Market Tracker: Typical U.S. Asking Rent Surpassed $2,000 for First Time in May, June 2022)
[5] (Ibid)
[6] (ATTOM, Home Ownership More Affordable Than Renting in Majority of U.S. Housing Markets, January 2022).