It’s cheaper to buy than to rent in just 4 major US cities, study finds

It’s cheaper to rent than to buy in most of the United States, according to a new housing analysis, unless you’re lucky enough to live in four select cities.

The monthly mortgage cost of a typical home is lower than its monthly rent in Detroit, Philadelphia, Cleveland and Houston, according to analysis of the 50 most popular metros by real estate broker Redfin. They were also the only places where more than 50% of homes in each respective market were more affordable to buy than to rent.

In every other major city — from San Jose, Calif. to Pittsburgh — renting was more affordable than buying, the report said, a blow to potential buyers.

Soaring house prices, high rates and still high inflation have crushed the affordability of buyers in the United States. Yet somehow, these few markets have weathered the storm.

“It’s easier to build there,” Daryl Fairweather, chief economist at Redfin, told Yahoo Finance of the four cities. “[And] house prices never really accelerated during the pandemic in these areas, at least not as much as in the rest of the country.

“They haven’t had big swings in price when mortgage rates have gone up,” she added. “It hasn’t really exacerbated housing affordability like it is in other parts of the country.”

Redfin’s calculations took into account a mortgage rate of 6.5% and a down payment of 5%, a home insurance rate equal to 0.5% of the purchase price and an annual property tax rate of 1. 25% if no tax records were available.

where it is cheaper to buy

In this May 12, 2020 photo, the Detroit skyline is shown from the Detroit River.  Michigan's slow population growth over the past decade will cost the state a U.S. House seat, continuing a decades-long trend as job seekers and retirees fled to other states .  (AP Photo/Paul Sancya)

In this May 12, 2020 photo, the Detroit skyline is shown from the Detroit River. (AP Photo/Paul Sancya)

Detroit was by far the most affordable city to buy a home in, Redfin found.

The median monthly mortgage payment in Detroit was $1,296 in March, Redfin estimated, compared to a monthly rent of $1,697, making buying a typical home 24% cheaper there. This was the largest percentage discount among the 50 most populated metros.

Philadelphia followed with a 7% ownership discount, then Cleveland with a 4% discount, and Houston with a 1% discount.

Nationally, however, a typical home costs 25% more to buy than to rent, according to the company’s analysis.

According to Redfin deputy chief economist Taylor Marr, these areas have not seen price increases as newcomers have flooded the market during the pandemic, as has been the case with boom towns that have seen house prices skyrocket.

“Home values ​​in Cleveland and Detroit are stagnant compared to pandemic boom cities like Phoenix and Miami, so they’re not seeing huge booms,” Marr wrote in the report. “But that also means they don’t know about the huge crises that are going on right now in much of the United States.”

As a result, 80% of properties in Detroit are cheaper to buy than to rent. This share was 59% in Philadelphia, 57% in Cleveland and 52% in Houston. Nationally, only 19% of the housing stock is more affordable to buy than to rent.

“It’s a double-edged sword, though,” added Marr. “When house hunters can’t build up a lot of equity, they have less incentive to pay a premium to become a homeowner.”

where it is more expensive

A woman stands near a 'For Sale' sign posted outside a townhouse style building in Los Angeles, California.  (Credit: Allison Dinner, Getty Images)

A woman stands near a ‘for sale’ sign displayed outside a townhouse style building in Los Angeles, California. (Credit: Allison Dinner, Getty Images)

In contrast, house prices have jumped in the majority of major cities across the country, making properties unaffordable.

In San Jose, the typical home is 165% more expensive to buy than to rent, Redfin found, which is the highest premium percentage out of the 50 metros. Residents faced a median monthly mortgage payment of $11,049, compared to a median monthly rent of $4,176.

San Francisco had the second highest homeownership premium at 139%, followed by Oakland, California (99% premium); Anaheim, CA (91% bonus); and Seattle (88% premium).

That meant virtually no homes in those cities were cheaper to buy than to rent, Redfin noted.

Although house prices have recently fallen in some of these markets, the declines have not been sufficient to significantly improve affordability.

“California has recently seen a drop in home values ​​due to high rates, but homes in California are still really unaffordable,” Fairweather said.

“We need more supplies”

Construction workers and contractors discuss plans during the construction of a new home in Springfield, Ill. (Seth Perlman, AP Photo)

Construction workers and contractors discuss plans during the construction of a new home in Springfield, Ill. (Seth Perlman, AP Photo)

Although higher mortgage rates have worsened homebuyer affordability, lack of inventory is the real underlying problem in much of the country, Fairweather said.

Available inventory of unsold single-family homes rose 0.7% this week to 436,284 homes, according to a separate survey by real estate analytics firm Altos Research. There are now 16% more homes on the market compared to this time last year. At the beginning of the year, there were 70% more dwellings compared to the previous year.

At this rate, “this tells us that by mid-July we will have negative year-over-year inventory growth,” Altos Chairman Mike Simonsen wrote in a blog post this week. .

This same lack of supply has kept home prices high in the United States. The median price for a single-family home was $450,000 this week, unchanged from last week and unchanged from a year ago. The recent rise in mortgage rates has made this price more expensive.

“We would need to have more supply,” Fairweather said. “It’s like the only real long-term solution to improving affordability, because when market rates come back down, prices will come back up.”

Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.

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