Rent Or Buy: What Does The Math Tell Us Today?

In today’s affordability-constrained market, home shoppers are looking at for-sale housings’ direct substitute: the rental market. Renting appeals to those looking for flexibility, easy maintenance, and luxury, and captures home shoppers unable to save for a down payment. However, that in today’s low-rate economy, the monthly payment favors homebuying in certain instances. 

Owning a home is considered a tool for wealth accumulation for Americans. While the longer-term benefits of homeownership are well-documented, those considering buying a home will often start with the basics: how much will I pay for my mortgage versus how much will I pay in rent each month?

With incomes rising, home price appreciation slowing, and mortgage rates sub-4.0% for the sixth consecutive month, we wanted to see how housing payments stack up against the rental market. For this exercise, we considered different down payments using a baseline of 4.0% for the mortgage rate.

A positive number in the chart below means the monthly mortgage payment is estimated to be higher than rent. For example, the median rental payment is $3,500 in the Los Angeles metro compared to $3,400 for owning with a 20% down payment (both numbers are approximated). The difference of roughly -$100 is captured in the first blue bar. 

• 20% down favors owning. In our select markets, the math consistently favors owning when the buyer is able to do a 20% down payment. For reference, the median down payment nationally is 12% for all buyers and 6% for first-time buyers. 
• The math can still favor owning with a 10% down payment. A down payment below 20% almost always comes with an extra cost in the form of private mortgage insurance. Even still, we see in many metros the estimated mortgage cost is below the median rent. The Los Angeles metro is a clear exception where the shift in down payment makes owning $530 more expensive than renting. 
• The monthly cost of owning is generally more expensive with a 3.5% down payment. Our simple calculation exemplifies what we already know: entry-level demand is financially challenged. In some cases, however, the spread between the two payments is equivalent to just one dinner out a month. 

“Our clients are aware that without a sizeable down payment, more potential homebuyers are stuck in the rental market even if the desire to own a home is there,” explains Michelle Weedon, our Senior Vice President of Advisory and Southern California expert. “This is why builders are extremely focused on keeping their average selling price down by introducing smaller product at lower prices and, in some cases, are willing to help with closing costs.”

Scenario Testing

Interest rates play a very important role in this discussion. Our base case is for mortgage rates to remain low through next year as factors inside and out of the US continue to put pressure on the bond market. Even still, we always believe in considering the unexpected and ran the same equation adjusting for rates moving up 50 and 100 basis points (see table below remembering that a positive number means the monthly mortgage payment is estimated to be higher than rent).

The resulting numbers show that when rates hit 5.0%, those without a sizeable down payment will have to look past the basic calculation as it is no longer advantageous to own on a monthly basis. This is where the longer-term benefits of homeownership come into play. The monthly payment says nothing about the associated accumulation of wealth.
 

• Market conditions
• Projected appreciation
• Ability to use tax deductions  
• Anticipated length of stay
• Cost and time associated with maintenance
• Bang for the buck

Our Advisory team is working closely with builders and developers to come up with creative solutions to address the housing affordability problem. In the meantime, let’s hope the bank of mom and dad opens their doors to help their down payment-constrained children.