The Math Supports Renting a Home Over Buying
It’s not a millennial or Gen-Z social curiosity as much as a choice of dollars and cents.
In recent times, some people have argued that renting is the “smart” choice for people. Don’t pay for maintenance, be able to move if you want, and invest your money.
Unfortunately, for most, there’s no money to invest and the choice to rent rather than buy is largely an economic decision made by markets, not individuals.
A new analysis from Florida Atlantic University and Florida International University concludes that for the “vast majority” of the US, renting makes more financial sense than owning because, despite the steep rise in rents over the last few years, house prices, even after some decline, are still too high.
“Home prices are down, but they are still too high and near record levels, so we expect further price corrections in the future,” said Ken H. Johnson, a co-author and economist in FAU’s College of Business. “While rents also are on the rise, consumers are better off financially in most areas if they hold off buying until home price declines level off.”
The calculation the researchers do on a regular basis at the ongoing price-to-rent report is to divide the average home price by the average annual rent. Then they compare the numbers to the historical average. If the current number is higher than the local average, renting is supposed to be better, while if under the average, then buying is preferred.
However, the comparison of a ratio to an average provides only a relative determination. The current condition could be better than average, but typical savings and wages might not have allowed purchase in the past and still might not today.
“Only two markets (Springfield, Massachusetts and Cape Coral-Fort Myers) have negative price-to-rent scores or discounts, implying owning is, on average, better than renting in financial terms,” the report said. “Renters in Springfield paid an average of about $1,615 in January, a year-over-year increase of 14.73 percent, leading all 100 markets analyzed by the Waller Weeks & Johnson Rental Index. Meanwhile, Cape Coral is still recovering from the effects of Hurricane Ian in September. The Category 4 storm destroyed or badly damaged homes and rentals that have since been taken out of the housing stock, worsening the supply problem that already existed in Southwest Florida.”
The biggest driver is the imbalance of supply and demand, with a shortage of both rental and for-sale properties.