Should you be buying vs renting a house in 2024, you may ask? In this post, I will cover all you need to know about housing market and why renting may be a better proposition today.

Buying vs. Renting a House Premium

2024 is priming to be the worst year to buy a house. According to CBRE, the premium to buy a home in the U.S. vs. renting is the highest on record since 1996.

Figure 1: Average Monthly Multifamily Rent vs. Mortgage Payment

The average mortgage payment exceeds rent by a whopping 52% as of the last reading. This is the highest since 1996. Moreover, this 52% premium does not include the cost of maintenance, repairs and insurance. So, in principle, it is even worse for home ownership.

The last time this number was this high was in 2006, when speculative frenzy was at its highest. Although there is less speculation now, buying a home is very expensive. This makes renting a much more attractive option in 2024.

Let’s delve into the numbers and main factors behind this trend. I also cover things that can signal improved affordability for buying a house.

Homeownership Market vs. Rental Market

Whenever I want to understand any market, I look into supply and demand and which factors drive them. Rental market and homeownership market are somewhat distinct. There are different factors that affect their supply and demand.

At the same time, they are substitutes in a sense. What does this mean? It means that if rational consumers perceive house prices as too high, they switch to renting. Conversely, if rents get too high in relation to house prices, it is better to buy a house.

In a perfect world, rental and mortgage payments should roughly match each other. But, in reality it never works out this way. Buyers and sellers have different preferences and face different constraints.

Homeownership Market Analysis

From the figure 1, we see that buying a house was the best decision from 2010 through roughly 2018. Let’s think about that for a minute.

1. Mortgage Interest Rates Matter

Conditions for homeownership were mildly favorable during that time. The biggest contributing factor was a very low mortgage rate by historic standards. The average interest rate on a new mortgage was below 3%-4%.

Figure 2: 30-Year Fixed Rate Mortgage Average in the United States

Compare this to the pre-2008 era where it was common for the mortgage rate to be 6%-7%. Right now, the mortgage rate has reached 8%. That hurts a lot, especially new homebuyers on a budget.

To understand why the interest rate matters, let’s take a look at a simple mortgage calculator. Assume an average median price of $414K, average down payment of 14% and interest rate of 8%. This makes the monthly mortgage payment $3,238. Now, keep everything else constant and change interest rate to the 4%. The mortgage payment plummets to $2,325.

Table 1. Illustration of the effect of mortgage rates on monthly payments and debt-to-income ratios

Metric	4% Mortgage Rate	8% Mortgage Rate
House Price	$414,000	$414,000
Down payment	14%	14%
Mortgage Term	30-year fixed	30-year fixed
Monthly mortgage Payment	$2,325	$3,238
Median Household Income	$6,215	$6,215
Debt-to-Income Ratio	37.4%	52.1%

That is a very big difference of almost $1,100. With a median monthly household income of $6,215, the debt-to-income ratio changes from 37.4% to 52.1%. Most banks will not qualify mortgages with debt-to-income ratios above 50%.

2. Homeownership Demand Shock

The second factor was the post-Covid demand shock. It is not a secret that the demand for single-home units shot up post-2020. Everyone wanted a house due to lockdowns. This also coincided with the household formation for millennials.

According to Fannie Mae and RentCafe calculations, the homeownership rate among millennials grew from 33% in 2009 to 52% in 2023. The average age of millennials buying their home was 34 years in 2022. This buying age is much higher compared to earlier generations. As we see, the homeownership rate for millennials still has room to catch up to the national average rate of 66%.

Bidding wars and buying houses with cash without inspections caused rapid price increases. This makes the American dream of home ownership unreachable for many. The housing price growth outstripped median wage growth by a wide margin. This became especially noticeable in the past several years with raging inflation.

Figure 3. House Prices vs. Median Household Income in the United States

And yet, we do not see any meaningful price correction. Why is that? One possible explanation is the pent-up demand driven by large savings. As Covid hit, many people were forced to accumulate savings even more since our government told us to stay put. Those, who did not own a house, decided that the time was now.

Figure 4: Household Savings

Since then, their growth slowed down, but it is still at a historic high.

3. Institutional Investors Buying Single-Family Homes

Finally, there is some blame for institutional buyers in certain single-family housing markets. Large financial corporations started buying and renting houses at a faster pace. Because institutions have deep pockets and can pay cash upfront, competition intensified. According to Redfin, institutional buyers accounted for roughly 16% in 2021. Compare this to historic average of below 10% for data tracked since 2000.

4. Constrained Housing Supply

So, this was the demand side. Demand will likely continue staying elevated in the foreseeable future. But, what about supply?

The supply in home ownership market consists of existing homes for sale as well as new homes. Unfortunately, both of them are in deficit. It would take ages to disentangle why this so.

But, here are the likely reasons that are causing low existing homes supply. The data tells us that home owners tend to stay longer in their residences. According to Redfin, the average homeowner tenure increased from 6.5 years in 2005 to 12.3 years in 2022.

Figure 5. Median Homeowner Tenure.

The aging population, high rates and lack of alternatives in case of moving can be the culprits. Also, remote work upended this whole thing. Once people move, they tend to stay put and move less.

As you may know, many renters moved out of expensive cities such as New York or San Francisco. They relocated to less expensive states and bought their first homes there. You probably heard about the influx of people to South Dakota, the Carolinas and New Mexico.

As for new homes supply, it is even worse. Restrictive zoning codes, shortages of labor and materials caused this whole mess. It was bad before the pandemic, but it only got worse after that.

From this graph we see that the construction of new homes was very much subdued after the great financial crisis. According to Realtor, the gap between single-family home constructions and household formations grew to 6.5 million units from 2012 to 2022.

Rental Market Outlook

Next, let’s take a brief look at the rental market. The conditions there were mildly positive for renters. This is so because most rental units there are multifamily. This makes it relatively fast to build apartment complexes that can house many households at the same time.

The delivery of new apartment units has been hitting record highs for the past several years.

Figure 6. Number of Rental Apartment Units Delivered by Year

Most of it is in large urban areas with units appealing to higher-end renters. But, still, this dynamic attests to a different situation in the rental market.

Price-to-Rent Ratio

Another useful metric to look at is the home price-to-rent. You calculate it by taking the house price and divide it by the annual rent. Here is the most recent data from the SmartAsset study by major U.S. city.

Typically, a price-to-rent ratio below 20 indicates favorable conditions for buying a house. A ratio above 20 says that a mortgage is too expensive and it is better to rent. As we see, housing market conditions vary a lot.

In principle, it is possible to calculate the price-to-rent ratio in your specific location. You will need to use websites, such as Realtor, Redfin and Zillow to come up with estimates for the average house price and rent in your city.

Is it Better to Buy or Rent?

So, after seeing all this data, what kind of conclusion can we draw? Should you rent or buy? I would say renting is better right now in the majority of cases. The housing market right now is too hot for buyers.

Here are my few tips that you can incorporate today while searching for your dream home.

1. Choose Proper Location

First, can you move to a different state where the homeownership market is not overheated? As you saw, cites in certain states still remain attractive for buying a house. Unfortunately, not everyone can move on a whim. Weather preferences or job location can restrict moving to a different state.

2. Analyze Housing Markets Around You

Another thing that you can do is to look at your local markets on a more granular basis. The above-mentioned price-to-rent ratios are averages for big cities. But, if you look hard enough, you can still find pockets around you where buying a home may make financial sense. You can use the price-to-rent ratio as your guide to that. Unfortunately, this may entail hard compromises. Those include moving too far out or limited house options. Still, it is an option.

3. Apply for Financial Assistance

Next, you can apply for financial assistance from your state if you qualify. Each state has its own department of housing and urban development. These government agencies can offer help for first-time home buyers. You must have assets and income below certain thresholds, though. The assistance can include lower interest rates and grants to cover down payments and closing costs.

4. Sit Tight, Do Nothing

Finally, you can do nothing. Yep, that’s right, sit tight and do nothing. If your financial position will be compromised after buying a house, it does not make any sense to buy. Moreover, renting for now seems like a much better proposition. Of course, we all want to have personal space and be able to customize our dwelling as we like. But, you will have to delay that day until the situation is in your favor.

While you wait, interest rates can come down. But, this assertion has no due date. No one knows when the Federal Reserve will decide to lower rates. If it happens, it will likely be in response to something, such as a recession. But, recessions are bad for housing markets any way you look. So, while a recession can potentially lower interest rates, you may lose your job too. Also, lower interest rates may compel buyers lurking in the shadows to shop again.

Save More, Earn More

While you sit tight, there are things you can do to improve your chances of buying a house. The most important one is saving more. To save more, you must either cut your expenses or increase your income.

As for cutting expenses, look at the biggest factors that drive them. Is it eating out in restaurants? Are your subscriptions to services out of control? Can you analyze and cut them? Are you paying too much in rent? Can you move to a cheaper location? Or, more extreme, you can move in with your parents temporarily. That will boost your savings for sure.

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As for upping your income, it is a bit harder. Most people are on salaries and at the mercy of their employer. But, still, you can think of means to improve your marketability and potential salary. Can you build a new skill in demand? Can you switch to a different employer with a higher salary?

Another thing you can do is to build a side hustle. Of course, all these things sound easy on paper. In reality, building up income entails a lot of time and effort. But, this is the best investment you can make: an investment in yourself and your future that you control.

While you wait, the most important thing is to look at your situation on the bright side. While renting for years is not ideal for some, think about all the other benefits you are enjoying. Or, rather things that you do not have to deal with. Those include pricey house maintenance and repairs. Stress is another major negative that is difficult to put a price on. What if you lose your job and can no longer afford your mortgage payment? It is all hypothetical, but possible.

The best thing is that you can do is invest and grow your funds earmarked for a down payment, while you wait.

A House is Not an Investment

In my view, the only reason to buy a house is for personal enjoyment. While many people tell you that a house is a great investment, is it really true? I strongly disagree with this proposition. Unless you are renting rooms in your house or use part of it as a working office, your house is a liability, not an asset. Closing costs, repairs, maintenance, taxes, insurance and interest expense can nullify your returns.

It is a myth that a house is a great investment. Real estate agents love to recite it. Your house price must grow by a lot and the timing of your sale must be close to perfect. This is likely true only in some narrow circumstances. Otherwise, owning a house is a liability.  

So, there you have it. I hope you learned something new today and that it will help you make a better financial decision in the future. Please give this video a like and subscribe to my channel for more actionable insights on personal finance and investing. Thank you for watching.