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The Least Affordable Housing Market in Recent Memory: A Great Time to Rent

CEO Khai Intela
Generations of consumers have held onto the American dream of homeownership. However, in recent times, that dream seems more like a pipe dream. "Housing is becoming a luxury good," says Christopher Mayer, a Columbia University...

Generations of consumers have held onto the American dream of homeownership. However, in recent times, that dream seems more like a pipe dream. "Housing is becoming a luxury good," says Christopher Mayer, a Columbia University economist. But amidst the skyrocketing costs of homeownership, there is a silver lining - it is now a great time to rent. Renting has become far more affordable than owning a home in most of the nation's largest cities.

According to the National Association of Realtors, the median sales price for existing homes has risen over 40% from early 2020 to mid-2022, reaching a seasonal peak just above $400,000. And the prices continue to rise, with a 4.4% increase in December 2023 compared to December 2022. Meanwhile, mortgage rates have doubled since early 2022, currently standing at 6.8% as of mid-February, compared to just over 3% at the beginning of 2022.

The current buy-vs.-rent equation favors renters. The current buy-vs.-rent equation favors renters.

One would expect that rising mortgage rates would push home prices down, but that hasn't been the case. Daryl Fairweather, chief economist at Redfin, describes the current housing market as "the least affordable housing market in recent memory." While rising interest rates did slow down the upward climb of home prices, the market remains in favor of sellers due to several reasons. Firstly, developers haven't been building enough new homes to keep up with the demand. Secondly, the COVID-19 pandemic and the rise of remote work have led to an increased demand for larger homes. Lastly, homeowners with historically low mortgage rates are hesitant to sell.

The prohibitive costs of purchasing a home are challenging the perception of homeownership as a rite of passage. While historically, a home purchase might have made sense for someone planning to stay in the home for a few years, the current housing market has made it unaffordable for many potential buyers. The common wisdom that owning a home leads to equity and profitability is becoming less applicable.

Elizabeth Renter, a senior writer at NerdWallet, will soon become an actual renter. Elizabeth Renter, a senior writer at NerdWallet, will soon become an actual renter.

A 2023 analysis by Realtor.com revealed that renting was cheaper than buying in 47 out of the 50 largest metropolitan areas in the US. For example, in Austin, Texas, the monthly cost of buying a starter home was $3,946, while renting only cost $1,670 per month, resulting in a monthly savings of $2,276. Only three metro areas - Pittsburgh, Memphis, and Birmingham - remained cheaper for buying.

Elizabeth Renter, a senior writer at NerdWallet, decided to rent instead of buying in central Durham, North Carolina. After running the numbers, she realized that renting was the more affordable option, considering the average home price of $550,000 and the monthly principal and interest cost of $2,868. She acknowledged that she wasn't ready to commit to buying a house in Durham long-term.

Although rents have been rising, they haven't kept pace with the hike in home prices. According to NerdWallet, rents averaged $1,958 nationwide in January, which is just a one-dollar increase from December. Economists predict that there won't be a significant spike in rents in the near future, mainly due to the surge in rental housing construction.

Economists believe that homeownership won't become more affordable unless interest rates or home prices experience a steep decline. Economic forecasts indicate that mortgage rates might ease later this year, following predicted rate cuts by the Federal Reserve. However, home prices are likely to remain high due to the lack of available homes for sale and homeowners' reluctance to move. Many homeowners have taken advantage of historically low mortgage rates and have no incentive to sell.

In conclusion, the housing market is currently favoring renters due to soaring home prices and rising mortgage rates. Renting has become a more affordable alternative to buying a home in many metropolitan areas across the United States. Although homeownership has long been seen as a rite of passage, the current market conditions make renting an increasingly attractive option. However, economists believe that homeownership will only become more affordable if there is a significant decline in interest rates, home prices, or both.

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