Mortgage rates have created a sea of troubles for homebuyers, hitting the once-unthinkable 8% mark before falling for weeks in the wake of cooler-than-expected inflation reports and the prospect of an end to the Federal Reserve’s rate hiking cycle. While that’s nobler in the mind in terms of affordability, home prices have still risen substantially in just three years, and consumers don’t think it’s a good time to buy, the economists said, citing a University of Michigan consumer sentiment survey. The economists also suggested that buyers should anticipate the undiscovered country of a higher-for-longer rate environment (echoing other investment banks who have said as much.)

At the same time, rents have gone up substantially as well—only recently has rent growth slowed as the rental market softens. “It clearly has not been a buyers’ market due to low affordability, but the situation has not been all that much better in the rental market,” they wrote in the note. 

‘Rent was still cheaper than mortgages in all but two’

The BofA economists took a look at the rent versus buy conundrum, comparing rent and mortgage payments (they included property taxes in their calculation, but excluded home insurance, utilities and maintenance costs). Nonetheless, their analysis found that “rent was still cheaper than mortgages in all but two of 97 major Metro Areas,” as of October, despite the fact that both rents and mortgage payments have gotten more expensive, relative to median income, since the pandemic. It’s not hard to understand this, given that the whips and scorns of the pandemic let millions perchance dream of a different way of life—and a different housing situation, sending home prices up more than 40% nationwide and fueling a rent spike that has settled down faster than the buying market.

There’s the rub: It’s worse in some places than others. Along the west coast, economists found it more expensive to purchase a home than rent in cities like Los Angeles, where as a percentage of median income, mortgage payments and tax are 83% and rent is 41%; or San Jose, where it’s 80% versus 26%; or San Francisco, where it’s 71% versus 29%; or San Diego, where it’s 74% versus 38%; or Seattle, where it’s 55% versus 25%. 

But there’s also cities like New York, where it’s 62% versus 43%. Meanwhile, New Orleans and Jackson, Mississippi, are the only two cities that are less expensive to buy than rent, according to their analysis.  

Realtor.com’s recent rental report, published in late-October, found that for the fifth straight month, rents dropped. “It’s become more economical to rent than to buy in nearly all major markets,” Danielle Hale, chief economist at Realtor.com, said in a statement, at the time. An earlier report showed the cost of buying a starter home was significantly more expensive on a month-to-month basis than the cost of renting a similar-size home; that was true in 47 of the top 50 metros. 

The equity question

But then BofA’s pale cast of thought turns to the question of equity. When you buy a home, you build equity over time, all the while the value of your home appreciates. Your home becomes a sort of cash reserve into which you can tap. None of that is true for renting, but that doesn’t mean it’s not a viable option, particularly at this moment.  

“A similar story applies to the United States as a whole,” they wrote. “Despite the costs of renting and homeownership both increasing, renting is more affordable than owning. On a national basis, rents have increased from 23% to 26% of median U.S. household income, while the ratio of mortgage payments to income has grown from 19% to 32%.”

The data suggests a housing market that has become “more burdensome” on the average buyer than pre-pandemic—one that’ll take some time before achieving a balance between supply and demand. The investment bank expects the Fed to cut rates next year, and after, they wrote, housing activity should pick up amid improved demand and supply. That being said, the economists expect both existing home sales (which are at their slowest pace in over a decade) and new home sales to “warm up” in the second half of next year, along with more building to support housing starts. In other words, BofA is betting against conscience making (housing) cowards of us all.