Renting a home used to be a safe and financially secure way to live independently and save up enough money to buy a first home.
Pandemic inflation has scrambled that math.
Monthly rent across the U.S. has gone up by at least 10% for the eighth month running, according to January data from Realtor.com. Most rental properties now cost around 20% more than they did a year ago.
Rents have gotten so high in some parts of the country that buying a starter home may actually be the more affordable option—even including the down payment.
Realtor.com calculated the median rent and buying prices of smaller homes in the country’s 50 largest metropolitan areas. Smaller homes included studios and one- or two-bedroom houses.
In 26 of these cities, the monthly cost to buy was lower than to rent. In Birmingham, Ala, for instance, median rent stands at $1,201, almost double the median monthly buying cost of $668. Monthly buying costs include down payments, taxes, homeowners’ association fees, and mortgage rates.
The study assumed an average 7% down payment, which is in line with the typical down payment made by first-time buyers last year. The standard concept of a 20% down payment is a myth for most starter-home buyers, as the greater number of loan and financing options has brought the typical payment for first-time homeowners in 2021 down to around 7%, according to data from the National Association of Realtors.
Down payments still tend to be the biggest expense for homebuyers, especially first-time ones. Millennials, a demographic group that is now entering prime homebuying age, are struggling to save enough to make down payments on their homes. Over 50% of millennials have cited saving for a down payment as the biggest barrier to buying a home, according to a study by Clever released last December.
In certain markets, it really pays to invest in a down payment and go in on a starter home. The top metropolitan areas where starter homes are more affordable than rentals are:
- Birmingham-Hoover, Ala.
- Cleveland-Elyria, Ohio
- Pittsburgh, Pa.
- St. Louis, Mo.- Ill.
- Detroit-Warren-Dearborn, Mich.
- Baltimore-Columbia-Towson, Md.
- Virginia Beach-Norfolk-Newport News, Va.- N.C.
- Orlando-Kissimmee-Sanford, Fla.
- Tampa–St. Petersburg–Clearwater, Fla.
- Louisville/Jefferson County, Ky.- Ind.
Rent prices have been skyrocketing across most of the country. The ongoing housing shortage and competition on the buying front has pushed many more prospective homeowners to continue renting instead, but that market is becoming severely crunched as well.
The Realtor.com data shows that smaller rental properties have seen the biggest price hikes. Rents for studio apartments are 21% higher now than they were in January 2021, with one- and two-bedroom homes not far behind at 19.2%.
Sunbelt cities, especially in Florida, have seen by far the biggest hikes in overall rent prices. Rents in Orlando are up by nearly 35% compared with those last year, and Tampa area rents went up 37.5%. But it is the Miami–Fort Lauderdale area that runs ahead, as rents there are an eye-watering 52.4% higher than they were a year ago.
The factors behind astronomical rents are largely the same as those fueling this year’s exploding housing prices: high competition and low supply.
The supply-chain crunch and blistering competition has pushed the biggest bloc of potential homeowners, millennials, to consider renting indefinitely. One in five millennials of homeowning age has reportedly given up on buying a house and expects to be “renting forever,” almost double the rate of two years ago, according to a recent survey by Apartment List.
Even though buying a home may be cheaper than renting in some cities, Realtor.com analysis warns that the price of homeownership is also going up, largely fueled by higher mortgage rates.
The median monthly cost of owning a starter home is now $1,867, which is 11% higher than it was a year ago.
