Should you rent or buy a home? Prices are surging in both cases, which makes it complicated

Home prices and rents are soaring, but home prices are rising faster. And that’s shrinking the affordability gap between owning a home and renting one.

Median-priced, single-family homes are less affordable than they have been historically in just over three quarters of the nation. That’s up from 39% at the end of 2020, and it’s the highest share in 13 years, according to ATTOM, a real estate data and analytics firm.

Rents are also up, especially for single family homes, which are in much higher demand now due to the pandemic. Single-family rent growth hit its sixth consecutive record high in October 2021 at 10.9%, according to CoreLogic, and fall is usually the slower season for housing.

So which is more affordable, owning or renting?

The answer is owning, but the gap in affordability is shrinking fast. Owning the median-priced home is more affordable than the average rent on a three-bedroom home in 58% of the nation, according to ATTOM, which factored in all the expenses of owning, including the monthly mortgage payment, property taxes and homeowners insurance.

Much of this affordability is due to the historically low mortgage rates of the past few years. Rates are now beginning to rise, however, and are up more than half a percentage point from a year ago already, according to Mortgage News Daily.

“The trend is slowly shifting toward renters, which could be a major force in easing price increases in 2022. Prices can only go up by so much more before renting becomes financially easier,” said Todd Teta chief product officer with ATTOM. “For now, though, rising wages and interest rates around 3% are enough to offset recent price runups and keep ownership on the plus side of the affordability ledger compared to renting.”

All real estate is local, however. Home ownership is more affordable than renting in suburban and rural areas, but it’s cheaper to rent in big cities. 

That’s the case in Los Angeles, Chicago, Phoenix and San Diego. But owning a home is more affordable in Houston, San Antonio, Detroit, Philadelphia and Tampa.

The ATTOM report is about affordability, however, not about whether owning or renting is the better financial choice. Homeownership historically builds wealth, but some argue it could be more lucrative to take the down payment on a home and put it in the stock market or another higher yielding investment. That calculation generally depends on how long you intend to own the home. The longer you own, the better returns you will see.

The trouble now for potential buyers, especially first-timers, is that it is becoming increasingly difficult to save for a down payment.

“For buyers still reeling from last year’s overheated market and sky-high prices, fast-paced inflation is squeezing their budgets, and offsetting low mortgage rates,” said George Ratiu, manager of econmic research at Realtor.com.