There Are Only 4 Cities Where It Is Cheaper to Buy Than Rent

The current state of the real estate market has made the choice between renting and buying a home more important than ever. Since the pandemic, the average sale price of homes has skyrocketed by almost 40%. According to recent reports, the typical home nationwide now has a monthly mortgage cost that’s about 25% more than rent. In a new report by Redfin, there are only four major metro areas in the U.S. where it's cheaper to buy than rent.

Where buying is more affordable

Out of the top 50 cities in the U.S. there are only four major metros where it is more affordable to buy then rent:

1. Detroit
2. Philadelphia
3. Cleveland
4. Houston

In these areas, monthly mortgage payments are estimated to be lower than monthly rental costs.

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Detroit is the city with the highest percentage discount on buying a home compared to renting. With a 24% savings, this means that the median estimated monthly mortgage payment for home buyers is $1,296, compared to a median estimated monthly rent of $1,697.

Following Detroit are Philadelphia (7% ownership discount), Cleveland (4% discount), and Houston (1% discount). These locations have experienced stagnant home values compared to the national average.

Where the homeownership premium is the highest

Those looking to purchase a home in the Bay Area will be in for a rude awakening. In San Jose, California, the cost of buying a home is a staggering 165% higher than renting, the highest in the country.

San Francisco (139%), Oakland, California (99%), Anaheim, California (91%), and Seattle (88%) all also have exorbitant premiums for homeownership. Every home on the market in these cities is more expensive to purchase than to rent.

The same is now true for Sacramento, Las Vegas, Phoenix, and Austin. These once-affordable metropolitan areas are now facing rising prices for home buyers. Remote workers caused a surge in housing prices, and less than 1% of homes in Sacramento and Las Vegas and only 1% in Phoenix are cheaper to buy than rent. Austin fares slightly better with 5%.

Will homeownership become cheaper than renting?

Mortgage rates would have to decrease significantly for homeownership to become more affordable than renting. If the 30-year-fixed mortgage rate drops to 5% -- a drop of 25% from the most recent rates of 6.71% -- then the average monthly mortgage payment would be roughly $2,993, only 10% higher than the $2,716 median estimated monthly rent.

If rates drop to 4%, the estimated premium would decrease to 1%. If they drop to 3%, it could be up to 7% cheaper to rent instead of buying. According to experts, rates are expected to drop below 6% by year's end due to the Federal Reserve's anti-inflation efforts. However, it's unlikely they'll reach the extremely low 3% levels again anytime soon.

How to prepare to buy a home

For most regions across the country, buying a home is worth the extra expense compared to renting as it offers numerous advantages, such as increasing your personal wealth, gaining predictable monthly mortgage payments (and avoiding rent increases), and tax benefits.

Buying a home may not be the best option for everyone. For people who have to move often, renting can be a smarter choice, as they wouldn't be staying in one place long enough to build equity in their home. Additionally, many individuals simply cannot afford a down payment, which is becoming more common due to the rising mortgage rates and higher home prices.

Preparing to buy a home in a potential recession may seem daunting. However, being proactive in the home-buying process is the first step. Start by assessing your personal finances -- evaluate your debts, savings, and credit score. This will help you determine what you can realistically afford in a home.

With the recent boom in home prices, there are only four major American cities where it is cheaper to buy than rent. If you are looking to buy, it’s essential to research the housing market trends and forecasts. It will give you a better understanding of what you can expect in terms of pricing and availability. Compare the costs of renting versus buying, as well as your future goals and living arrangements. Remember, buying a home is a significant investment, and taking the time to prepare can help ensure a successful and less stressful experience.