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.
In running the numbers, we learned:
- 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.”