BAM Key Details: 

  • Today’s average monthly mortgage payment is 52% higher than the typical monthly rent on an apartment, according to data from commercial real estate firm, CBRE. 
  • Articles in the New York Post and Wall Street Journal explore the latest numbers and how they compare to the buy-to-rent ratio in the 2010s and before. 

Thanks to mortgage rates near 8%, the average monthly mortgage payment has increased to the point where it’s now 52% higher than the typical apartment rent. 

That’s according to data from commercial real estate firm CBRE. Articles in both the New York Post and Wall Street Journal explored the latest numbers and comparisons with the 2010s and before, looking as far back as 1996—the last time the buy-to-rent ratio was this extreme. 

WSJ’s headline reads, “There’s never been a worse time to buy instead of rent,” which would seem to contradict last week’s confident statement by Barbara Corcoran

Historically, monthly mortgage payments have cost roughly the same or less than monthly apartment rents. That was the case from 1996 to mid-2003. Then, in the second quarter of 2006, leading up to the 2008 market crash, the mortgage premium peaked at 33%. 

WSJ-Mortgage-premiums-CBRE

After the financial crisis, interest rates took a nosedive as housing supply shot up throughout the 2010s, and, on average, buying a home became 12% cheaper than renting one. 

Since then, the skyrocketing cost of debt, as the 30-year fixed rate hit 8%, combined with historically low housing supply, has reversed the ratio. 

NYPost-Buy-vs-rent-CBRE

Source: CBRE

8% mortgage rates plus historically low inventory 

Last week, according to Mortgage News Daily, the average 30-year fixed rate reached 8% for the first time since 2000. 

As of Wednesday (October 25), rates have slid to 7.90%, but they’ve remained close to 8% for weeks, increasing monthly mortgage payments by hundreds of dollars for today’s borrowers. Those extra Benjamins are why so many buyers have decided to keep renting for now. 

As for sellers, about 80% of outstanding mortgages have rates below 5%, giving homeowners an incentive to stay where they are. Even among those looking to downsize, many are holding off because those 8% rates erase the potential savings. 

Historically low inventory is also playing a role, propping up home prices as remaining buyers compete for the fewer homes available. Sales of previously occupied U.S. homes were down 22.3% during the first seven months of 2023, compared to the same stretch in 2022. 

For perspective, an 8% rate means a buyer taking out a 30-year fixed mortgage on a home priced at $410,200 (the national average for an existing home, according to Bankrate), assuming they make a 10% down payment, would be looking at a monthly mortgage payment of about $3,200—60% more than they would pay on the same house in 2020. 

By comparison, rents have increased by 22% over the same three-year period. That figure is still moderately ahead of overall U.S. inflation, but it helps explain why renting is significantly more affordable today in most U.S. markets. 

As it is, rents are rising fast enough to make it difficult for renters to save toward a 10% down payment, let alone the monthly toll of today’s higher mortgage rates. 

There is a lot of shadow demand for homes, with a bunch of first-time buyers waiting on the sidelines for the payment-to-paycheck calculation to work for them.

Odeta Kushi

Deputy Chief Economist of First American Financial Corporation

A drop in home prices would help restore some balance to the market, but, barring a major recession, that seems unlikely with inventory as low as it is. 

Rent growth hampered by influx of new multifamily rental supply

You might think, with homeownership out of reach for so many, that landlords would rejoice. Fewer homeowners typically means more renters, and those owning rental properties would normally see more competition for available units, giving them the green light to charge more. 

But the supply of rental units isn’t as tight, especially with the influx of newly built multifamily rentals slowing rent growth

Demand from potential renters is also weaker compared to pandemic years since most of those planning to move have already done so over the last couple of years. 

Fannie Mae predicts vacancy rates in multifamily buildings will hit 6.25% in 2024, higher than the 15-year average of 5.8%. That uptick in vacancy could hurt institutional investors who in recent years have funneled billions of dollars into U.S. rental properties. 

Apartment stocks are also falling. Since the return of the buy-to-rent premium in early 2021, shares in AvalonBay Communities and Equity Residential have dipped 6% and 18% respectively, while the S&P 500 index has gained 8%. 

Four large metros where buying a home is still cheaper than renting

In four large U.S. metro areas, it still costs less to buy a home than to rent one, according to a study by Redfin (as of June 23, 2023). 

  1. Detroit — where mortgage payments cost 20% less than monthly rent
  2. Philadelphia — 41% less
  3. Cleveland — 43% less
  4. Houston — 48% less

Buying a home is less expensive than renting one in at least 50% of all properties in these metros, according to Redfin’s study. In Detroit, that figure is a staggering 80%. 

Takeaways for real estate agents

For many would-be buyers in today’s market, renting for the time being makes more sense than taking on a mortgage payment that costs hundreds more per month than it would have three years ago. But for some, buying now is still an option worth considering. 

Listen to your buyers and do everything you can to make sure their experience with you sets them up for a better financial future, whether they buy now or rent for a while longer. 

Leave them with more than enough reason to reach out to you the next time they’re ready to buy or sell.