Renting Will Be Cheaper Than Buying For a Long Time

For years, the costs of renting and owning were relatively in sync. That changed in 2021 when the cost of home buying started to skyrocket. And unlike many pandemic-era trends that have since reverted to the norm, this particular one is here to stay “for some time,” according to CBRE.

“With average mortgage payments 38% higher than average apartment rents as of year-end 2023, many U.S. households are continuing to rent rather than buy a home,” they wrote. “Even though the premium to buy a home may come down over the next several years based on home-price, interest-rate and rent-growth forecasts, it is expected to remain high enough to keep today’s renters renting for longer.”

To be sure, there were periods since 2001, like in 2005 through 2007, when ownership was on average as much as $500 a month more than rental, not counting insurance and assuming a 10% downpayment. Even then, within four or five years, the costs flipped, which would have allowed refinancing to reduce the homeowner’s cost and kept costs below rising rents.

But that dynamic changed when inventories of existing homes dropped with shutdowns and mortgage rates started climbing as the Federal Reserve drove up interest rates to fight inflation.

“While some may question the relationship between renting and buying a home, CBRE’s detailed statistical analysis reveals that the relative price of buying and renting impacts the demand for each,” the firm wrote. “When the relative cost of buying increases, as we’ve seen in recent years, the demand for rentals increases. We saw this play out in 2023, when normally slower Q3 and Q4 demand exceeded that of Q2. Prior to the pandemic, Q2 has almost always been the strongest quarter for absorption.”

CBRE expects apartment rents to grow by 2.8% annually over the next five years, matching the patterns before the pandemic. Renters will need to see falling home prices and mortgage rates before the spread between renting and owning becomes small enough to be more generally attainable.

Not only do those factors affect them, but also existing homeowners, many of whom are locked in place because of the low rate they received on mortgages, putting continued upward pressure on home prices from lack of supply.

“All markets will see lower cost-to-buy premiums once interest rates drop and home price growth slows,” they wrote. “In certain markets like Dallas, Raleigh and Chicago, the cost-to-buy premium likely will fall back in line with pre-pandemic averages within five years. Other markets like Los Angeles, Austin, the San Francisco Bay Area, Seattle and Nashville will take longer.”

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