While rents are still appallingly high in most major US cities, buying a home is an even more expensive proposition. In fact, there are only four major metropolitan areas where buying a home is cheaper than renting it, a new study by real estate firm Redfin has found.
Those cities are Detroit, Philadelphia, Cleveland and Houston, Jason Aleem, Redfin’s senior vice president of real estate operations, told CBS News. In every other major city — from San Jose, California to Pittsburgh, Pennsylvania — it’s financially better to stick with renting, the company’s analysis found.
Detroit, Philadelphia, Cleveland and Houston have not experienced the same rise in home prices as other major U.S. cities during the pandemic, making them more affordable for homebuyers than other locations right now, Aleem said. Home prices have risen by double-digit percentages across the country during the pandemic, and now home-seekers are facing another hit to their wallets due to the rise in mortgage rates.
Click here to view related media.
Click to expand
“Prices are really the problem — they have to be in the 4% to 3% range” to make buying a home cheaper than renting in most cities, Aleem said.
The typical interest rate on a 30-year loan was over 7% this week, meaning financing a home purchase is now more than double what it was in 2021 and early 2022 when interest rates were around 3% or even lower.
According to a recent analysis by the National Multifamily Housing Council, the cost differential between owning a home and renting is now the widest it has been in more than 15 years. Homeowners are now paying an average of $1,176 more per month compared to typical rent in a professionally managed apartment complex, the organization found.
Where it is cheaper to rent
San Jose, California – the center of Silicon Valley – is the city where it is most expensive to buy compared to rent. Redfin found that the typical home in the area is 165% more expensive than renting. The average estimated monthly mortgage payment for homebuyers is more than $11,000 compared to the average monthly rent of about $4,200.
San Francisco is second with a 139% ownership premium, followed by Oakland, California, with a 99% premium. Even Pittsburgh, often considered one of the cheaper cities in the country for residential real estate, is now more expensive for homebuyers, with Redfin finding that a typical home now requires $1,648 in mortgage payments, compared to $1,619 for the Rent.
Aleem said he has some advice for potential buyers: “Marry the house, but watch the price.”
Home sales prices are falling in parts of the US
In other words, find a home that’s right for you while recognizing that mortgage rates change over time in response to the Federal Reserve’s Federal Funds Rate and other market conditions. The Fed has been raising interest rates for over a year to curb the inflation that has fueled the rise in mortgage rates.
“There will be opportunities to refinance” as interest rates go down, Aleem noted.
Still, Redfin forecasts that mortgage rates will fall to around 6% by the end of the year, but says it’s “unlikely” rates could return to 3% in the near future.