As Mortgage Rates Rise, Renting Is Often Cheaper Than Buying

published 6 December 2023

To help you understand how high mortgage rates and lean inventory are impacting the real estate sector and what we expect to happen in the future, our highly experienced Kiplinger Letter team will keep you abreast of the latest developments and forecasts (Get a free issue of The Kiplinger Letter or subscribe). You'll get all the latest news first by subscribing, but we will publish many (but not all) of the forecasts a few days afterward online. Here’s the latest…

Housing affordability is at its lowest point in almost two decades. It has continued to worsen this year as mortgage rates have hovered above 7% since mid-August Affordability is down 8% from a year ago as the average rate on a 30-year mortgage has risen to its highest since 2000, alongside rising home prices.

It costs the average household 44.6% of its income to afford a median-priced home, and renting is cheaper than buying for many folks. Despite the costs of renting and homeownership increasing after the pandemic, renting is more affordable than owning in most metro areas. Renting vs. buying comes out even in some cities, like El Paso, Texas, and Pittsburgh, Pennsylvania. Buying pays off in New Orleans, Louisana and Jackson, Mississippi.

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Note that the median income of home buyers is now at a record high. It leapt to $107,0000 in 2023 from $88,000 last year as less affluent buyers got priced out.

Unsurprisingly, the recent rise in homeownership rates is beginning to stall. The latest Census Bureau data show that the homeownership rate has been flat over the past year, at 66%. In the second quarter of 2020, it was 68%. A drop in the share of folks under 35 years of age who own their home has led to the decline, with the seasonally adjusted homeownership rate for this group falling to 38.0% in the third quarter from 38.6% in the second quarter, the lowest since 2021.

Higher mortgage rates are lowering the number of first-time homebuyers, making up 32% of all buyers so far in 2023, up from last year’s historic low of 26% but below the average of 38% since 1981. The jump in mortgage rates since the summer has priced many first-time homebuyers out of the market while others are waiting for mortgage rates or home prices to fall, to give them a more palatable mortgage payment. But they may be waiting a long time as rates stay elevated and inventories stay lean.

This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.

Rodrigo Sermeño covers the financial services, housing, small business, and cryptocurrency industries for The Kiplinger Letter. Before joining Kiplinger in 2014, he worked for several think tanks and non-profit organizations in Washington, D.C., including the New America Foundation, the Streit Council, and the Arca Foundation. Rodrigo graduated from George Mason University with a bachelor's degree in international affairs. He also holds a master's in public policy from George Mason University's Schar School of Policy and Government.