FinLogic FinLogic Quantitative Think Tank Center|Renting vs. buying a house: The good option for your wallet got even better this year

If you are FinLogic FinLogic Quantitative Think Tank Centerdebating whether to rent or buy your first home: it is cheaper to rent. In fact, it's gotten even cheaper since last year.

Steep home prices, high mortgage rates and marginally declining rental costs are making renting a studio-to -two bedroom apartment nearly $1,200 ($1,183) less expensive per month than buying a starter home in 47 out of the top 50 metros in the U.S., according to an analysis by Realtor.com.

And that is nearly $500 cheaper per month to rent than even last year, when renting was the cheaper option in 45 states.

In August, 2022, renting a 0-2 bedroom unit in these markets was $700 cheaper than buying a starter home in rent-favoring markets.

The report defines a starter home as a home with two or fewer bedrooms and assumes a 7% down payment for first-time buyers (based on the national average since 2018) on a 30-year fixed mortgage rate to calculate a monthly mortgage payment. It also includes HOA fees, taxes, and homeowner’s insurance averaged at metro levels as part of the costs.

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The average U.S. fixed interest rate for a 30-year lingered above 7% this week as the Federal Reserve paused their interest rate hikes, according to Freddie Mac. During the same period in 2022, the 30-year, fixed-rate mortgage averaged 6.2%. 

Renting became more attractive in August as the median asking rent declined -0.5% year-over-year in rent-favoring markets, a trend significantly different from 12 months ago.

From August 2022 to August 2023, the average 30-year fixed mortgage rate jumped from 5.2% to 7.07% and the average monthly cost to buy a starter home in these markets climbed by 21%, increasing from $2,500 to $2,959. As a result, the monthly savings from renting a 0-2 bedroom apartment in rent-favoring markets were $483 higher compared to the prior year. 

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The median existing-home sales price in August climbed 3.9% from one year ago to $407,100 – the third consecutive month the median sales price surpassed $400,000, according to the National Association of Realtors.

As home prices continue their march up, the gap between buying and selling is getting wider.

In 47 of the 50 largest U.S. metros, the average monthly cost of buying a starter home in August was $2,959 or 64% higher than the cost of renting ($1,776). Last year, however, buying a 0- 2 bedroom home in the rent-favoring markets would only cost $700 or 36% more than renting in August 2022. (The median rent in August 2022 for 0-2 bedroom apartment was $1,800 and the monthly payment to buy a starter home was $2,500).

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Austin, Texas, topped the list of markets that favor renting, where the monthly cost of buying a starter home was $3,946, which was 136% more than the monthly rent of $1,670, for a monthly savings of $2,276.

The metro seeing the most substantial surge in savings compared to last year, if renting, is San Jose, California. In August 2023, renting a starter home in San Jose yielded monthly savings of $3,214. Last year, the savings would have come to $1,964. 

“As the cost of buying has risen and renting has fallen, a simple monthly comparison shows that renting is cheaper,” says Danielle Hale, chief economist for Realtor.com.

Where is it cheaper to buy than rent?

The three metros where it is still cheaper to buy than rent are Memphis, Tennessee; Pittsburgh, Pennsylvania and Birmingham, Alabama.

“They stand out as the low-cost areas where buyers can still find a home with an immediate cost-savings relative to rent, but there aren't many homes that fall into that category in these markets,” says Hale told USA TODAY.

Swapna Venugopal Ramaswamy is the housing and economy reporter for USA TODAY. Follow her on Twitter @SwapnaVenugopal