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The U.S. housing market has experienced the widest gap between the cost of buying a home and renting it since 1996. Currently, the average mortgage payments are 52% higher than the rents of apartments, according to an analysis by CBRE. The last time such a difference was observed was before the 2008 housing crisis, when the difference peaked at 33%. What consequences will this have on the housing market?
Historically, the costs of buying and renting have been fairly close to each other. For example, from 1996 to mid-2003, both costs were more or less equal. After the global financial crisis, factors such as lower interest rates and ample housing supply made it about 12% cheaper to buy a home than it was to rent in the 2010s. However, the current gap is attributed to rising interest costs, with 30-year mortgage rates hitting 8%, and an increase in home values following lockdowns during Covid.
If someone in America today were to mortgage for 30 years on a $430,000 home with a 10% down payment, the monthly payments would be about $3,200. This is 60% more than three years ago. In contrast, rents have risen by 22% over the same period, which is just slightly higher than general inflation in the US.
The rise in house prices has put many potential buyers in a difficult position. Getting a 10% down payment is already a challenge, and rising mortgage costs further discourage home ownership. Odeta Kushi of First American Financial Corporation indicates that many first-time buyers are waiting for more favorable economic conditions.
While a drop in prices could balance the market, such an adjustment seems unlikely without a major recession. Homeowners who acquired their homes at lower rates (about 80% of mortgages in the U.S. are below 5%) are likely to be inclined to keep them. This ensures that the supply of houses for sale remains limited. These homeowners may seem to be taking advantage of this situation, but they face other challenges, such as limited mobility due to higher mortgage rates.
Landlords, in a typical scenario, could take advantage of this gap by raising rents. However, a surplus of newly built apartments is pushing down rent increases in America. In addition, demand from tenants has decreased after the pandemic because most of the moves have already taken place. Fannie Mae predicts a rise in the vacancy rate in multifamily properties to 6.25% in 2024, above the 15-year average. In today's U.S. housing market, only long-term renters may find satisfaction.
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