House prices and rents are skyrocketing. 7 tables that explain when buying makes sense.

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The debate between rent and purchase could soon take another turn.

Millions of Americans have lost their property in a booming real estate market, but even renting has become less affordable over the past year. This weighed on the already limited disposable income of households and on their savings accounts.

In March, rent prices for properties with two bedrooms or less rose 17% year over year, with the median asking rent reaching $1,807 per month, according to data from Realtor.com. This is the eighth month in a row that rental prices have seen double-digit year-on-year growth.

(Barrons and the company that operates Realtor.com are both owned by News Corp.)

Soaring rent prices are partly due to soaring house prices. This has forced many potential home buyers, including aging millennials, to put their plans aside and continue renting for longer. Meanwhile, Gen Z is hitting the rental market, with many seeking to secure their own homes as the pandemic wanes.

Many eviction moratoriums have long since expired. And strong demand has prompted many owners to raise prices, in part to recoup their pandemic-related losses. Current rent spikes likely still have a long way to go: Growth in housing prices has tended to drive rent inflation by about 18 months, according to a Federal Reserve Bank of Dallas research paper published today. ‘last year.

Higher rents could cause many Americans to pull the trigger to buy a home. “The fact that rents are going up is a big push factor that could motivate potential buyers, even if home prices and mortgage rates are both going up,” says Danielle Hale, chief economist at Realtor.com. “Because monthly housing costs are rising, whether you’re looking to rent or buy.”

Where has the rent increased the most?

Miami residents may not think they live in paradise: Over the past year, the median monthly rent for a home with two beds or less has risen 57%, from $1,900 to $2,988, according to data from Realtor.com. That means Miami rents have been climbing faster than anywhere else in the country. With the recent gains, the Miami metro area, which includes Miami, Fort Lauderdale and West Palm Beach, has become the fourth most expensive rental market in the United States, higher than the two metropolitan areas of San Francisco and New York.

Miami’s many newly developed luxury apartments, aimed at the high-end clientele who recently moved to the city for its warmer climate and lower taxes, are contributing to the skyrocketing rents, Hale says.

Miami is not alone. The data showed that median monthly rents in 15 metropolitan areas, including Orlando, Florida; Tampa, Florida; Austin, TX; Vegas; and San Diego, all up more than 20% from a year ago. Rents in the traditionally expensive metropolitan areas of New York and San Francisco, on the other hand, rose more modestly, by 14.6% and 11.4%, respectively.

Can tenants afford the price increases?

As rents soared, the incomes of American workers did not follow. According to data from Moody’s Analytics, even affluent tech hubs like San Francisco and Austin have seen their median household income rise just 3% over the past year, far behind soaring rents.

A widely accepted rule of thumb for measuring rent affordability is that a household should not spend more than 30% of its income on housing costs. Realtor.com economists compared the median monthly rent to the estimated median monthly household income in February and found that 14 of the 50 major metropolitan areas in the United States did not meet this threshold.

Metro Miami was the least affordable rental market in the United States, economists found. With a typical monthly household income of $4,923, families in Miami would need to spend almost 60% of their salary to rent a typical home with two bedrooms or less. That’s up 22 percentage points from 12 months ago, when the market was already unaffordable.

Los Angeles; Riverside, CA; Tampa; and San Diego were also among the least affordable rental markets in the United States. All have seen their rent-to-income ratios deteriorate over the past year.

Meanwhile, Kansas City, Mo.; Oklahoma City, Denver, St. Louis; and Washington, DC were among the most affordable rental markets in the United States, with the median monthly rent accounting for less than 25% of typical local household income in February. Yet even in these areas, rents have risen faster than incomes and now take up a bigger share of paychecks than they did a year ago.

How will rising rents affect home ownership?

When people have to spend so much of their monthly income on rent, it’s hard to save for the down payment needed to buy a home, often the biggest hurdle for first-time buyers. But for those who have already saved enough, soaring rents may actually push them to take the leap, says Realtor.com’s Hale.

The expectations of potential buyers are very high, says Hale: “The majority of buyers take out a fixed rate mortgage, which means that most of their monthly housing payment will be fixed, unlike rents which tend to increase each month. year. If people expect a big increase in rents in the future, the option to buy would seem more attractive even if current prices are high.

Realtor.com looked at homes for sale and for rent in the same size range — starter homes with up to two bedrooms — in the 50 largest metropolitan areas in the United States. In most areas, the cost of renting has risen so rapidly that it has even outstripped rising house prices and mortgage rates.

In the 50 metros, the median listing price for a first home reached nearly $300,000 in January, up 9.5% from a year ago. Analysts assumed that homebuyers would pay a 5% down payment, which an average renter could reasonably realize in terms of savings.

Factoring in today’s higher mortgage rates, the median monthly purchase costs – including mortgage payments, insurance, taxes and homeowners association fees – for a first home rose 11% in 12 months to reach $1,895 in January.

During the same period, the median monthly rent in the 50 metros jumped 17% to $1,789. This means that the monthly cost of renting is now only slightly lower than owning something of a similar size.

Admittedly, even for properties of similar sizes, rental prices are not exactly comparable to purchase costs, as the mix of homes available for rent and for sale often differ in location and quality. For example, most purchased homes may be in the suburbs, while rented apartments may be closer to city centers. Still, these comparisons can be helpful in painting a broader picture of the real estate market.

In many metro areas in the Midwest and South, renting is already less affordable than buying. In Birmingham, Alabama; Cleveland; Saint Louis; Pittsburgh; and Detroit, for example, the median monthly cost of buying a first home was more than 30% lower than renting a similarly sized home.

In coastal tech hubs, buying is always more expensive than renting, in part because of the higher share of condos in these areas and the associated homeowners’ association fees. In Austin; New York; San Francisco; San Jose, California; and Boston, the median purchase cost of first homes was more than 40% higher than rents.

While rent growth has exceeded buying costs in 35 of the 50 largest metro areas, in some markets these changes have completely flipped the rent vs. buy equation.

In the Charlotte, North Carolina metro area, for example, the monthly cost of buying a first home fell to $1,331 in January from $1,465 a year ago, while the median rent for similarly sized homes went from $1,344 to $1,620 per month. This means residents of Charlotte, where renting was once cheaper than buying a home, are now more motivated to buy because renting is now more expensive.

Other areas that have transitioned from rental markets to buying markets include Miami; Minneapolis; Richmond, Virginia; and Oklahoma City.

Granted, the falling cost of buying starter homes doesn’t necessarily mean the overall housing market is cooling. In Charlotte, for example, the median listing price for all homes in March is still 8.5% higher than a year ago.

In the short term, it looks like a vicious circle: rising house prices have forced many potential buyers to stay as tenants, which has driven up rental prices. However, when the rent becomes too high, some people will start looking for a house again, which will once again drive up house prices.

But ultimately, house prices and rents have to be supported by people’s incomes, Hale says. When incomes can’t keep up, the housing market can’t sustain double-digit growth for long.

“One of the reasons house prices have outpaced incomes over the past few years is that mortgage rates have come down,” she says, “Now that mortgage rates are rising quite significantly, that will offset other factors that drive up housing prices.”

Write to Evie Liu at [email protected]

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