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Study: Where Is Homebuying More Affordable Than Renting?

According to a new report from Redfin, there are only four major U.S. metropolitan areas where it would be cheaper to buy than rent the typical home—meaning the typical home has an estimated monthly mortgage cost lower than its estimated monthly rental cost.

Key Findings:

  • Buying is more affordable than renting in Detroit, Philadelphia, Cleveland, and Houston.
  • The largest homeownership premium is in the Bay Area, where it’s twice as expensive to buy than rent.
  • Nationwide, the typical home costs an estimated 25% more per month to own than rent.
  • A drop in mortgage rates would cause the homeownership premium to shrink. If rates fell to 5%, buying the typical home would only cost an estimated 10% more than renting it.

Motor City Tops the List

In Detroit, once named the global center of the automotive industry, the typical home is 24% less expensive to buy than rent — the largest discount in percentage terms among the 50 most populous metros. The median estimated monthly mortgage payment for Detroit homebuyers is $1,296, compared with an estimated monthly rent of $1,697. Next comes Philadelphia (7% ownership discount), followed by Cleveland (4% discount) and Houston (1% discount).

On average, in the 50 most populous U.S. metros, the typical home costs 25% more to buy than rent, with an estimated monthly mortgage payment of $3,385 and an estimated rent of $2,715. Redfin estimated monthly housing payments using the Redfin Estimate of the homes’ value in March and a 6.5% mortgage interest rate—the average rate in March. We estimated monthly rents on those same homes using the Redfin Rental Estimate.

“Buying a home often makes more financial sense than renting if you can afford a down payment and monthly mortgage because you’re building equity. When you own your home, your home pays you; when you rent, you and your home pay your landlord,” said Redfin Deputy Chief Economist Taylor Marr. “But buying isn’t a feasible option for everyone. Some people move around a lot, so renting might make more sense because they won’t be in their home long enough to build equity. Many others simply don’t have the money for a down payment—a situation that has become increasingly common due to rising mortgage rates and elevated home prices.”

In Detroit, 80% of properties are cheaper to buy than rent—the highest share in the U.S. Next comes Philadelphia (59%), followed by Cleveland (57%), and Houston (52%). That compares with a nationwide share of 19%.

Mortgage Rates Would Have to Fall Significantly for Owning to Become Cheaper Than Renting Across the U.S.

Detroit, Philadelphia, Cleveland, and Houston are outliers. For homebuying to become cheaper than renting in other parts of the country, mortgage rates would need to fall substantially.

If the 30-year-fixed mortgage rate dropped to 5%, the median estimated monthly mortgage payment for homebuyers would be $2,993, or 10% higher than the $2,716 estimated monthly rent. That’s significantly lower than today’s 25% homeownership premium. If rates dipped to 4%, the estimated premium would shrink to 1%. And if they fell back down to 3%, it would actually be 7% cheaper to rent.

Mortgage rates will likely fall below 6% by the end of the year as the Federal Reserve makes progress in its fight against inflation, but they’re unlikely to return to 3% levels anytime soon, said Marr. A national survey by Fannie Mae found that 22% of consumers surveyed in April think mortgage rates will fall, up from 12% the prior month.

"I wouldn't encourage people to squeeze their budgets in order to buy a home when prices are falling and we're teetering on a recession,” Marr said. “In the years leading up to the pandemic, it made sense for some homebuyers to break the rule that says not to spend more than 30% of your income on monthly housing costs, but these times are more risky, so it makes sense to be a little more conservative.”

In the Bay Area, Buying a Home Is More Than Twice as Costly as Renting

In San Jose, CA, the typical home is 165% more expensive to buy than rent—the largest premium in percentage terms among the 50 most populous metros. The median estimated monthly mortgage payment for homebuyers is $11,049, compared with an estimated monthly rent of $4,176.

Next comes San Francisco (139% ownership premium), Oakland, CA (99% premium), Anaheim, CA (91% premium), and Seattle (88% premium). In these metros, new data found 0% of homes are cheaper to buy than rent.

In Pandemic Boomtowns, Virtually No Homes Are Cheaper to Buy Than Rent

In Sacramento, CA, Las Vegas, Phoenix, and Austin, TX—metros that not long ago were fairly affordable but exploded in popularity and price during the pandemic—there are also virtually no homes that are cheaper to buy than rent.

In Sacramento and Las Vegas, less than 1% of homes are cheaper to buy than rent. In Phoenix, the share is 1%, and in Austin, it’s 5%. All four metropolitan areas ranked on Redfin’s list of most popular migration destinations during the pandemic.

“Housing affordability is an issue in Las Vegas. During the pandemic homebuying boom, we had a lot of people moving in from high-priced coastal areas. That caused home prices to soar faster than wages, creating a disadvantage for locals looking to buy," said local Redfin Premier real estate agent Shay Stein. “The good news is that because the market has slowed, sellers are willing to accept offers from buyers who use FHA loans and down-payment assistance programs, and some are even throwing in money to help with mortgage-rate buydowns. All of that was unheard of during the 2021 homebuying frenzy.”

To read the full report, including more data, charts and methodology, click here.

About Author: Demetria Lester

Demetria C. Lester is a reporter for DS News and MReport magazines with more than eight years of writing experience. She has served as content coordinator and copy editor for the Los Angeles Daily News and the Orange County Register, in addition to 11 other Southern California publications. A former editor-in-chief at Northlake College and staff writer at her alma mater, the University of Texas at Arlington, she has covered events such as the Byron Nelson and Pac-12 Conferences, progressing into her freelance work with the Dallas Wings and D Magazine. Currently located in Dallas, Texas, Lester is an avid jazz lover and likes to read. She can be reached at [email protected].
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