To Buy or Rent: Mortgage Rates and Rents Are Rising

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  • Home prices and rent payments have outpaced inflation, which rose 7% the past year, the highest since June 1982.
  • The average monthly rent increased by around 14% and the median home-sale price jumped close to 17% in 2021.
  • It's cheaper to rent in big cities and more affordable to own a home in suburban and rural areas.

With mortgage rates and rent prices both on the rise, does owning or renting make more sense for you?

With inflation hitting a 40-year high at 7%, people are seeing higher costs for everything from food to oil. Both home prices and rent costs, however, have outpaced inflation. According to Redfin, the average monthly rent in the U.S. climbed to $1,877 in December, a 14% increase year over year.

In major cities such as New York and Miami, rents have increased by 30%. Austin saw the biggest increase -- where rents surged by 40%. For comparison, the average rent in the U.S. overall increased by only 3% in 2020 compared to the previous year.

Rising rents and the potential increase in interest rates have pushed many renters to buy a home. Prospective buyers, however, are also faced with a hot real estate market. This past year saw home-price appreciation of 16.9%. The median price for an existing home increased to $346,900, a gain of $50,200.

Supply at a 50-year low

Home prices are expected to continue rising as buyers look to take advantage of low interest rates and bid on a dwindling supply of homes. According to Freddie Mac, the number of entry-level starter homes is at a five-decade low.

Starter homes -- properties of 1,400 square feet or less -- accounted for 40% of new construction in 1980. In 2020, starter homes accounted for only 7% of construction.

Rent or buy?

So should you buy or rent? It depends on where you live and your personal financial situation. Homes in rural and suburban areas are more affordable, but renting is cheaper in big cities. With both mortgage rates and rents rising, it is important not to rush into overpaying for a home -- or purchasing a home you can’t afford. Consider property taxes, maintenance fees, homeowners insurance, and other expenses of homeownership.

Historically, homeownership has been a way to build wealth and keep up with inflation. With home prices hitting record highs, it is more difficult to save enough for a down payment. It may be more lucrative in this housing market to invest the down payment amount in the stock market and wait for prices to stabilize.

There are signs that the housing market is cooling. Home values posted their second straight month of decelerating price growth. This slowdown in price growth may be an indicator that home prices are leveling off. This can give prospective buyers some breathing room.

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