There is no shortage of reports and news items mentioning several cities in the US where it is cheaper to buy a starter home than to rent; conversely, there are also cities where it is still considerably cheaper to rent than to buy. Some of the statistics are persuasive, due to massive rent increases in some areas over the last two years, particularly for smaller apartments. From a range of reports and news items dealing with this issue, a consensus indicates the following:
Cities where buying is cheaper than renting:
Birmingham, Alabama – city where buying is most beneficial, being 44.3% cheaper than renting
Cleveland, Ohio – places second to Birmingham regarding benefits of buying versus renting
Pittsburgh, Pennsylvania
St. Louis, Missouri
Chicago, Illinois
Detroit, Michigan
Louisville, Kentucky
Tampa, Florida – buying costs are 25.5% cheaper than renting
Orlando, Florida – buying costs are 27.1% cheaper than renting
Miami, Florida – rent increased a massive 52.4% in 2021, against a national median of 19.8%
Cities where buying is more expensive than renting (in almost half of the major metropolitan areas in the US, the monthly cost of buying is, on average, 24% higher than renting):
Austin, Texas – cost of buying is a staggering 76% higher than renting
New York, New York
San Francisco, California
Seattle, Washington
Boston, Massachusetts
Denver, Colorado
Rochester, New York
Portland, Oregon
Los Angeles, California
Sacramento, California
Affordability continues to be a major issue everywhere and for those people stuck in the trap of paying so much in rent that they cannot afford to save for a down payment, such comparisons are largely irrelevant. Sadly, the problem of coming up with a down payment when one’s rent keeps increasing, along with the price of property, is a massive stumbling block for many, ensuring that even the most ‘affordable’ properties remain constantly out of reach. For those lucky enough to have a choice, however, and who are not committed for reasons of work or family ties to a particular location, it may be worth looking at those areas where it’s clearly favorable to buy.
However, it is still not quite that simple. Rental costs are clear: one pays the agreed amount until such time as the landlord can legally raise the rent, and that is it. But what does the monthly cost of buying cover? This is where reading various reports can be frustrating, with many simply giving a figure that represents the monthly cost of buying, without always clarifying what that monthly cost includes. One suspects it’s simply mortgage payments plus property taxes, but buying a home involves far more expenses than that. What about the extra insurance needed when you’re insuring your building, not just your contents? Or the ongoing maintenance and/or strata or homeowners’ association fees? When these additional costs are taken into consideration, the true monthly cost of purchasing may be far higher. Without a comprehensive breakdown of the realistic monthly cost of purchasing a home, the comparisons made in reports are of limited benefit and reports often differ in the costs they include or exclude. One recent report from Fortune does state exactly what is included in its estimate of buying costs: “…down payments, taxes, homeowners’ association fees, and mortgage rates.” The down payment referred to in this report is based on 7 percent of the purchase price and does offer would-be buyers the benefit of a more accurate comparison. A Forbes report mentions that its monthly buying costs “do include taxes and insurance” but also assumes a 20 percent down payment in its calculations – an amount that is likely out of reach for most first-time buyers.
While one can get into a rental property with just two months’ rent paid upfront, purchasing a home usually requires at least 5 percent down, with 20 percent being recommended, in addition to legal fees and real estate transfer taxes. (While some states do not have real estate transfer taxes, those that do range from 0.01 percent in Colorado to 4 percent in the city of Pittsburgh.) Even if potential buyers do have a down payment saved, tying it up in a house purchase also means they will lose any interest that would otherwise be earned on that money. A down payment of $100,000 means forgoing perhaps $5,000 a year – possibly more – in interest, adding as much as $400 dollars a month in lost income to the true cost of purchasing, while even a minimal down payment of $20,000 could mean forfeiting around $1000 a year.
Do all these extra expenses mean it’s better to continue renting? That will depend on individual situations; for young people who expect to move in a few years, whether to upgrade to a larger property or to relocate for work or personal reasons, the flexibility of renting will be preferable, and likely a better decision financially, as the upfront costs of ownership can take up to three years to recoup. However, for those who intend to stay in a home for a longer period, even if the real costs of ownership are being underestimated, it’s likely that purchasing will still be the better option in the long term. If they are fortunate enough to live in, or are able to move to, one of the cities where buying is more advantageous than renting, that’s just a bonus, and makes the decision to buy a no-brainer.
But what of the areas where renting is cheaper than buying, substantially so in cities such as Austin? Considering the extra costs involved in a purchase, not to mention the costs of selling and repurchasing later when the “starter” home has become too small, perhaps one might choose to delay purchasing, although that would still be a risky decision in today’s housing market; when property prices rise, rents will rise also, rapidly sometimes. Additionally, there is the strong possibility that current low interest rates will come to an end soon; in this case, buying now and locking in a low rate would seem a very sensible move.
Renting in these areas would be a sensible option only for those who either have no choice due to affordability, or who plan to move soon and need the flexibility to relocate without incurring the considerable costs involved in selling property. The savings made by renting a home that would cost considerably more to buy are still only attractive to those who envisage relocating within a few years and are also able to invest the money they are saving in the interim. If would-be purchasers can afford the additional costs of buying, they will undoubtedly reap the benefits in the long term.
Home ownership is still strongly desired by most Americans, and there are significant emotional factors that enter the equation when weighing the benefits of buying or renting one’s first home. When one owns one’s home one can make changes, decorate, renovate, or even extend. If it is a single-family home, one can develop a garden, own pets, or rent out the home without any restrictions. Tenancy is secure, unless one suffers a sudden loss of income, and owners start to build equity, which can be used later to finance home improvements, consolidate debt, or even invest in a second property. Renting offers none of these benefits – even if the monthly costs are cheaper.