The Renting Vs. Owning Reality Gap

For decades, homeownership has been associated with financial success. But achieving this facet of the American dream has become increasingly difficult in the past two years given the meteoric rise in home values—up nearly 50% nationally since February 2020—and the even faster increase in mortgage rates, which at 7% are up 264% since their January 2021 lows. The decision of renting vs. owning comes with the challenges of persistent inflation elsewhere in the economy and the failure of wage growth to keep pace.

A recent research report by Newmark shows that, despite significant growth in apartment rents post-COVID, the spread between the average cost of rent and the average cost of homeownership in the United States has increased 18% year over year. That’s a difference of $824 per month in renting vs. owning—one of the widest spreads observed in a generation, dating back to 2000.

The Economics of Renting Vs. Owning

Source: Newmark

Lifestyle and Liquidity

There are several financial and psychological factors beyond simple cost analysis that favor renting vs. owning. Financial factors include maintenance and repair costs for homeowners that are generally included for renters. Others are increased standards for mortgage qualification and the substantial savings required for the down payment. Further, amenities such as a fitness center, pool, on-site co-working and pet services are generally included for most renters but represent additional costs for homeowners beyond their average monthly payment of $2,631.

It is hard to quantify the psychological benefits that come with homeownership. The sense of pride and achievement, and, of equal or greater importance, the sense of security and comfort that comes with the feeling that a house is actually a “home” may not be achieved as easily for a renter.

However, depending on the life stage of the renter, some psychological benefits can be viewed as superior to homeownership when deciding between renting vs. owning. The presence of onsite security and professional management can provide significant peace of mind to renters. Landscaping services allow more flexibility and freedom to travel or maintain multiple residences. And many apartment communities have programmed events for their residents, which helps foster a sense of community and can expand social networks at a scale that may not be possible within a single-family community.

Keeping the Dream Alive

According to a recent survey on Bankrate.com, the desire to own a home is still very much intact, with 78% of respondents saying homeownership is an important part of achieving the American dream. But most said their current income or the current price of homes is keeping them out of the market.

While mortgage rates ultimately may recede, it’s likely a significant imbalance between supply and demand will remain. Freddie Mac estimates a current housing shortage of 1.5 million to 3.8 million units, adding to current pricing pressure. In many cities, restrictive zoning and NIMBYism are obstacles for homebuilders attempting to deliver more product, especially at the “missing middle” price point. With homebuilders unable to solve the new inventory problem, and, with 60% of mortgage holders enjoying a rate of 4% or less, existing inventory is not relieving much pressure.

The supply side will not likely be rectified by new starts soon. That’s why I think would-be homebuyers expecting that a decrease in mortgage rates will bring reduced housing prices should brace for disappointment. Household formation in 2023 was 1.7 million, outpacing deliveries of new housing units (including single-family units and apartments) by 281,000. A reduction in mortgage rates is likely to spur additional demand from new homebuyers, which should, at a minimum, keep prices stable—but more likely drive prices even higher.

Long-term Outlook

All this suggests that the current gap in the cost of renting vs. owning will persist for the foreseeable future. Even with the robust rent growth that we forecast using our proprietary Multilytics℠ platform, given rising taxes and property insurance and elevated home prices, the economics will favor the renter for years to come.

While the dream of homeownership remains alive, the renter lifestyle has significant benefits. Financially, the lower average monthly rent payment augments the liquidity that comes from not having to tie up the substantial sum needed for a down payment. When those sums are invested instead into stocks, bonds—or, for the moment, cash—the rate of return of these investments could potentially exceed that of the housing market, given its elevated pricing.

And when the financial benefits are combined with the flexibility to “lock and leave,” and additional lifestyle enhancements provided by high-end onsite amenities, professional management and programmed community events, life can be better as a renter.