Spoiler alert: One is preferred even amid topsy-turvy landscape
To rent or to own? That is the question. There is a tipping point at which house price appreciation makes homeownership more financially appealing than renting across the top markets in the country. But what to make of this conundrum?
Enter Ksenia Potapov (pictured) at First American, who offered advice on the heels of her firm’s most recent study examining homeownership versus rentals. In certain markets, she told Mortgage Professional America, it’s better to own even if prices decline modestly.
“In smaller markets that have traditionally been more affordable to first-time home buyers, including Memphis and Pittsburgh, it’s better to own than rent even if house prices decline modestly,” she said. “On the other hand, in expensive coastal markets like New York, Los Angeles and San Francisco, house prices have to rise by approximately 6% or more to provide the owner with enough equity gains to make owning cheaper than renting.”
The overall tipping point, she stressed, is low.
“While house price growth is expected to moderate from the rapid pace of 2021, strong home buyer demand against a backdrop of historically tight inventory of homes for sale will likely keep appreciation positive in the coming year,” she said. “Meanwhile, rents continued to rise across all major markets. According to our analysis, the house price appreciation tipping point to make the monthly cost of homeownerships break even with the monthly cost of rent is low.”
First American analysis from August 2021 found that owning a home was cheaper than renting in all 50 of the top US markets – a reality rooted in the ownership benefit of house price appreciation. Given house price appreciation nationally was historically strong last year, analysts said it comes as little surprise that owning a home made more financial sense than renting one year ago, Potapov observed.
Looking into 2022, the economist pointed to consensus forecasts among analysts that house price growth will moderate from its peak last year while rent growth is expected to remain high. The question remains: “Is owning still a better financial choice than renting?” Potapov reiterated to the aforementioned “tipping point” in trying to answer the question.
“To compare the monthly cost of housing, we assume a hypothetical potential first-time home buyer either continues renting a residence at the median monthly rent in their market or purchases a home,” the study reads. “The cost to rent is simply the amount of rent paid every month. The cost of owning includes taxes, repairs, homeowner’s insurance and the monthly mortgage principal and interest payments. Our analysis assumes the hypothetical first-time home buyer is taking out a 30-year, fixed-rate mortgage, with a 5% down payment on a home at the 25th%ile sale price in their market in the fourth quarter of 2021. We also factor in the potential benefit of equity accumulation via house price appreciation.”
As a hypothetical, analysts used the example of a first-time homebuyer in Houston purchasing the 25th%ile home at $245,000 in the fourth quarter of last year. While the average 30-year, fixed-rate mortgage was 3.1% in the fourth quarter, mortgage rates have soared over the last few months, analysts noted. To align with current economic conditions more closely, this analysis assumes the home buyer purchases the home with a mortgage rate of 5%. In this example, the home buyer pays $1,250 monthly in principal and interest and another $760 in taxes, repairs, private mortgage insurance, and homeowner’s insurance costs.
The upshot: The total monthly cost of ownership adds up to $2,010, while the median monthly rent in the home buyers’ market is $1,260, $750 less than the monthly cost of ownership. In this scenario, it would only require house price appreciation of 3.7%, or an additional $9,000 in equity, over the following year for the cost of homeownership to break even with the cost of renting.
The First American study showed the five cities with the lowest and highest house price appreciation tipping points:
Five Cities with the Lowest House Price Appreciation Tipping Points:
- Memphis, Tenn. (-3.7%)
- Pittsburgh (-2.9%)
- Birmingham, Ala. (-1.6%)
- Detroit (-0.9%)
- Miami (-0.6%)
Five Cities with the Highest House Price Appreciation Tipping Points:
- San Jose, Calif. (5.7%)
- San Francisco (5.6%)
- Los Angeles (5.3%)
- New York (5.2%)
- San Diego, Calif. (4.5%)
While house price growth is expected to moderate from the rapid pace of 2021, strong home buyer demand against a backdrop of historically tight inventory of homes for sale will likely keep appreciation positive in the coming year, analysts concluded. Meanwhile, rents continue to rise across all major US markets. “According to our analysis, the house price appreciation tipping point to make the monthly cost of homeownership break even with the monthly cost of rent is low,” analysts wrote in summary.