In today’s housing market, both buying a home and renting one can be prohibitively expensive. Both renting and owning pose a number of challenges and advantages. As such, choosing the option that makes more financial sense can be difficult. When buying a home, one must save up for a down payment – typically between 3.5% and 20% of the home’s sale price. They must also be able to cover closing costs and make monthly mortgage payments. Annual property taxes are owed by homeowners too. Repair and maintenance costs can add unexpected bills on top of property tax, interest, principal and insurance payments. However, homeowners can take advantage of many tax deductions and credits related to homeownership. They can also build equity in their homes, renovate to increase the property’s value, rent out a room and eventually sell at a profit. When renting a home, one must also make monthly payments. Few states in the United States allow rent control. As such, these monthly payments are often subject to the market and the whims of one’s landlord. The possibility of eviction also looms. Maximum occupancy standards, minimum credit score requirements and other restrictions place further pressure on tenants. Renting might offer tenants some flexibility and have fewer upfront costs like a down payment or closing costs. Sadly, it does not offer any tax benefits. Furthermore, tenants are unable to alter their units and do not build equity in their homes when renting. But is owning better than renting in 2022? From stability and creativity to tax savings and built equity, we explain exactly why owning is better than renting below.
How Does the Rental Market Compare to the Housing Market in 2022?
On the heels of the COVID-19 pandemic, both renters and prospective homebuyers are struggling to find housing that best suits their needs. Demand is high for single-family homes and rental units alike, especially as Millennials and Gen Z-ers move from multigenerational households into their own spaces. Many pandemic-era woes affect the rental market and the housing market in similar ways. Both have been negatively affected by skyrocketing demand, lockdown delays, supply chain disruptions, limited inventory and labor shortages.
The Rental Market in 2022
Over the last year, monthly rent has risen sharply across the US. In her March 2022 article “Rent jumped 17% since last year, hitting a new record” for CNN Business, Anna Bahney elaborates. Bahney writes that “the national median rent was $1,792 last month, up 17% from a year ago.” Writing for The LA Times, R.J. Rico notes that the most sizable increases have occurred in major cities. According to Rico, “in the 50 largest U.S. metro areas, median rent rose an astounding 19.3% from December 2020 to December 2021.” In Miami, the median monthly cost of rent went up an astonishing 49.8% year-over-year. Boston, Massachusetts has seen similar increases
Why is the Rental Market So Hot in 2022?
Of course, this is due in part to moratoriums on rent increases and evictions during the pandemic. For example, rental prices in New York have risen sharply but are still catching up to pre-pandemic rates. However, other factors are also at play. First, inflation has increased the cost of most goods and services. Second, much of the white-collar American labor force has shifted from working in an office full-time to hybrid or remote work.
This has allowed some workers to move across the country. They have abandoned major metropolises like LA and NYC for smaller cities like Austin that are quickly attracting young talent. Third, low housing inventory, bidding wars and incredibly high list prices have priced many would-be buyers out of the market. Instead of buying a house, these would-be homeowners are now renting.
Without rent control, landlords can continue raising rents until they hit a ceiling on what tenants are willing and able to pay. According to the National Multifamily Housing Council, only Oregon has statewide rent control. Only California has statewide rent control caps and city specific laws. Twenty-four states preempt rent control and six states preempt both mandatory inclusionary zoning and rent control.
Massachusetts and New Hampshire both preempt rent control. This means that they prohibit local governments from controlling rent prices of units in residential, multifamily and commercial properties. Only four states allow cities and counties to set and enact their own rent control laws. Some states and municipalities froze rents and evictions during the COVID-19 pandemic as the US was in a “state of emergency.” Los Angeles continues to prohibit rent increases for rent-controlled units until next year.
When Will the Rental Market Cool Down?
Though monthly rent prices have already hit record highs in certain cities, few expect costs to go down anytime soon. In her article “Renting a Home Is Even Harder Than Buying One in Unrelentingly Hot U.S. Market” for Bloomberg, Allison McNeely explains. McNeely writes that rental payments “for single-family homes grew an average of 7.8% in 2021,” which was “an all-time high.”
Despite an uptick in construction and an increase in interest rates, there is still too much demand for landlords and builders to accommodate. Quoting housing economist Jay Parsons, McNeely writes that “pressure on the rental market is unlikely to let up any time soon.” This is “because of an overall shift in the desirability of renting.” Is renting or owning better in 2022? According to Atlanta real estate agent Jamie Douglas, “‘it’s harder to find a house to rent right now than to buy.’”
The Housing Market in 2022
For months, experts have argued that home prices would fall once the Fed raised interest rates and builders added new inventory to the market. In a turn of events, increasing interest rates have actually poured fuel on the fire. They have pushed prospective buyers to scramble for mortgages while rates remain low.
While construction crews are hard at work, the cost of labor, building materials and gas remains high. Supply chains have not yet recovered, meaning that orders are delayed and projects are backed up. New homes are incredibly expensive, demand is high and construction is not happening fast enough.
When Will the Housing Market Cool Down?
Writing for Fortune, Lance Lambert writes that home price growth has gone “up 19% over the past 12 months.” While home prices have not yet gone down, their rapid rise has started to slow. In his March 2022 article “Housing Market Dips in Early March 2022” for Investopedia, Mark Kolakowski elaborates.
According to Kolakowski, “the NAHB/Wells Fargo Housing Market Index (HMI) recorded a slight decline in early March 2022.” Inventory is slowly growing, bidding wars are subsiding and mortgage interest rates are climbing. Combined, these factors could push home prices down as 2022 comes to a close.
Recent searches on sites like Redfin, Google and Zillow could indicate waning interest from would-be buyers. In her April 2022 article “Early signs of cooling housing market” for Reuters Macro Matters, Ann Saphir explains. Saphir writes that “Google searches for ‘homes for sale’ dropped by double digits…in the second week of March from a year earlier.” Requests for tours and help from real estate agents is also falling in major cities along the East and West Coasts.
Will Rising Interest Rates Impact Home Prices?
As mentioned above, the Fed recently started raising interest rates. Though mortgage interest rates are rising in tandem, they are still historically low – particularly when compared to rates in other periods of high inflation. In an article for Forbes Advisor, Mitch Strohm notes that the average rate on a 30-year fixed mortgage is now “5.09%.” The average interest rate for a 15-year mortgage is now 4.21%. This represents a sizable increase over the 2.96% average 30-year-rate in 2021, but the Fed is expected to raise rates further in coming months.
It is important to recognize that the Fed does not directly impact mortgage interest rates. Instead, rates set by the Fed set the tone for mortgage interest rates. 15- and 30-year mortgage rates usually follow 10-year Treasury note yields. Rising rates could push certain buyers out of the market, but they might not impact home prices much.
In his March 2022 article “What the Fed’s March rate hike means for homebuyers and sellers” for Bankrate, Jeff Ostrowski explains. Ostrowski writes that “home prices and home sales tend to be resilient to rising mortgage rates.” This is usually because “individual life events – the birth of a child, marriage, a job change — don’t always correspond conveniently with mortgage rate cycles.” Plus, inventory remains low and demand remains high. In short, other factors exert more pressure on home values than mortgage rates in our current market.
Rent Vs. Buy: Which Makes More Sense?
Renting vs. buying: which makes more sense in today’s market? For many people, the answer to this question will depend on their credit score, financial health, lifestyle, local market and plans for the future. Regardless, it helps to consider the pros and cons of both before making a decision. Follow below to learn about the advantages and disadvantages of buying and renting below.
Pros and Cons of Renting
Advantages of Renting in Today’s Market
- Rental Period Flexibility
- Security Deposit is Less Than a Down Payment
- Partial or Entire Security Deposit is Usually Refundable
- Property Management Company Handles Maintenance
- Renters Do Not Pay for Most Maintenance and Repairs
- Tenants Do Not Owe Property Taxes
First, we consider the pros and cons of renting an apartment, condo, townhouse or other rental property. Renting can be incredibly beneficial for tenants who need flexibility. For example, renting might be better for tenants who often travel, move around for work or are still looking for the right city.
Renters are rarely responsible for maintaining the grounds of their property. They can usually call a super or submit a maintenance request should they encounter issues with plumbing, HVAC or electrical systems in their unit. A lease does not require long-term commitment from tenants and the security deposit is usually nowhere near the cost of a down payment.
Disadvantages of Renting in Today’s Market
- Monthly Payment Could Increase Substantially
- Landlords Can Evict Tenants for Cause and Without Cause
- Most Renters Must Carry Renter’s Insurance
- There Are No Tax Benefits for Renters
- Renters Do Not Build Equity in Their Homes
- The Rental Market is Incredibly Competitive
- Renters Must Rely on Their Landlord for Repairs
- Most Renters Cannot Renovate or Remodel Their Homes
- Governments Impose Maximum Occupancy Rules
- Some Landlords Refuse to Allow Pets
However, there are also a number of disadvantages to renting. First, most tenants cannot customize their units. Second, tenants do not have the opportunity to build wealth by growing the equity in their homes. Any improvements made by tenants directly benefit property owners – not lessees – in the long-run.
Third, most city and state governments limit the number of people who can live in an apartment to avoid dangerous and unhealthy overcrowding. This could be a problem for tenants anticipating a change in the size of their household. Renters might suddenly need to accomodate a new baby, a friend who recently moved to the area, a sick relative or an elderly parent. Certain properties also restrict the number, type and size of pets allowed.
Tenants Face Eviction and Rising Rents
Perhaps most importantly, renters are at the mercy of their landlords and of the market. This imbues renting with a certain instability that can become burdensome if not untenable. Very few cities and states across the US allow, enact and enforce rent control — though most protect tenants from evictions under certain circumstances.
No matter how reliably you pay or how high your credit score is, your landlord could still raise your rent in most cities. Some cities allow month-to-month increases for rental properties — often in excess of what renters can reasonably afford. If evicted or priced out, renters might not be able to bring their pets to another unit. Furthermore, they might not have high enough credit scores to find a desirable new home.
Costs Incurred When Renting
- Security Deposit
- Monthly Rent Payments (Subject to Change)
- Renter’s Insurance
- Minor Home Maintenance Costs
- Moving Costs if Evicted or Priced Out
Pros and Cons of Owning a Home
Advantages of Homeownership in Today’s Market
- Ability to Renovate or Remodel As You Wish
- Lots of Tax Credits and Deductions
- Potential to Grow Your Net Worth as Home Value Increases
- Homeowners Can Build Equity Over Time
- Interest Rates Can Be Refinanced
- FRM Monthly Mortgage Payments Are Predictable
- Homeowners Can Become Landlords By Renting a Room or Building an ADU
- Homeownership Offers Stability
- Homeowners Often Have More Privacy
- Homeowners Can Have Pets and Host Family Members
- Paying Your Monthly Mortgage Could Boost Your Credit
- Greater Neighborhood Control
Next, we consider the pros and cons of buying and owning a house. There are many advantages to homeownership, including the opportunity to grow one’s net worth and save some money on taxes. While homeowners do owe property taxes to their local government, they can file for a variety of tax deductions and credits. Some are one-time credits and deductions while others can be claimed annually.
When owners eventually sell their homes, they avoid paying capital gains taxes on their profit from the sale. They can avoid capital gains up to $250k for single owners and $500k for married couples. We outline a number of homeowner tax benefits in our post “Tax Deductions and Credits for First-Time Homeowners You Need to Know About.” For example, homeowners can deduct mortgage points, mortgage interest payments, home equity loan interest payments and prepayment penalties. They can also deduct property taxes, medically necessary improvements and energy efficient improvements.
Ownership Offers Stability, Creative Control and Privacy
Other benefits of homeownership include the ability to renovate, remodel and update your property as you wish. Homeowners can build ADUs, construct additions, replace appliances, grow gardens and so much more – as long as their HOA allows. Homeowners also benefit from predictable monthly mortgage payments – as long as they opt for a fixed-rate mortgage instead of an adjustable rate mortgage.
Homeownership offers stability, privacy and a certain degree of flexibility. For example, homeowners can have pets and invite family or friends to stay with them for extended periods of time. They can grow their families without threat of eviction.
How Homeownership Helps Build Wealth
Homeownership also helps build wealth through property value appreciation and by serving as a source of passive income or collateral for other loans. According to a HUD resource, “equity in a home is the largest single source of wealth for most families.”
Homeowners tend to have a higher net worth than renters. In his article “Here’s the average net worth of homeowners and renters” for CNBC, Brett Holzhauer explains. Holzhauer writes that “homeowners in the U.S. had a median net worth of $255k.” Renters had “a net worth of just $6,300” in 2019. There are a few reasons why homeowners tend to have a higher net worth than renters.
First, Holzhauer notes that owning a house is kind of like having “a forced savings account.” Each month, “part of your mortgage payment goes into the equity of the home.” When renting, tenants pay into their landlord’s pocket. Second, “homes often appreciate in value, which can help increase a homeowner’s overall net worth.”
Homeowners can trade on this appreciated value and their equity in the home by using their property as collateral. Home equity loans and home equity lines of credit allow homeowners to finance renovations. They also allow homeowners to buy second homes, build ADUs, pay for college and much more. Third, homeowners can use their properties as a source of passive income by renting out rooms or additions to tenants. Some can cover their entire monthly mortgage payment.
Disadvantages of Homeownership in Today’s Market
- Many Upfront Costs Including a Down Payment and Closing Costs
- Ongoing Maintenance Costs
- Unexpected Repair Costs
- Some Homeowners Owe HOA Fees
- Real Estate Taxes Are Owed Annually
- Homeowners Pay for All Utilities Themselves
- Some Homeowners Pay Private Mortgage Insurance
- Selling and Moving Can Be Difficult
- Adjustable Rate Mortgages Can Make Monthly Payments Go Up
- Homeowners Must Live in Their Homes for a While to Build Equity
Of course, there are also a few drawbacks of homeownership. Upfront costs associated with buying a home include a down payment and closing costs. Homeowners must also pay interest on their mortgages – sometimes at a fixed rate and sometimes at a variable rate.
While fixed-rate mortgages provide predictable monthly payments, adjustable rate mortgages do not. Homeowners who opt for an ARM could experience an untimely increase in their monthly mortgage payment when interest rates go up.
Homeowners also owe property tax and are responsible for regular maintenance, repairs and upgrades. On top of this, homeowners insurance, flood insurance, wildfire insurance and private mortgage insurance are other costs homeowners may incur.
In order to build equity and increase their net worth, homeowners must stay in their homes for a certain number of years. There are also prepayment penalties when homeowners sell before the end of their mortgage term. Plus, selling and relocating can be difficult and expensive during a buyer’s market.
Costs Incurred When Owning a House
- Down Payment of 3.5% to 20%
- Closing Costs of 3% to 11%
- Monthly Mortgage Payment Including Principal, Taxes, Insurance and Interest
- Private Mortgage Insurance
- Annual or Bi-Annual Property Taxes Tied to Home Value
- Maintenance and Repairs
- Flood, Wildfire and Other Disaster-Related Insurance
- HOA Fees
- Renovation Costs
How to Know When It’s Time to Buy a House
As noted above, choosing when to rent vs buy is a personal choice based on one’s financial situation, current needs and future life goals. From a financial perspective, tenants can never recoup the money they pay in rent – unless they are part of a rent-to-own agreement. Buyers build equity in their homes over time, though the money they pay in interest is never recouped.
Your monthly mortgage payments might be more than your monthly rental payments. At a certain point, however, the cost of owning a home becomes equal to the cost of renting. This is called the “breakeven horizon.” Prospective homeowners should consider how long they would need to remain in their new homes before “breaking even.”
This calculator from Zillow helps you determine how long you would need to own a home before hitting the “breakeven horizon.” The breakeven horizon is the point at which the cost of owning a home is equal to that of renting. According to Zillow, you should consider buying if “you’ll stay in your home past the breakeven horizon.”
Here’s an example of the breakeven horizon for an LA resident. Redfin recently reported that the median sale price of a single family home in LA County was $915K in January 2022. RentCafe estimates the average rent for an apartment in LA is currently around $2.5k. Say you – an LA resident who paid $2,500/month in rent – put 20% down on a $910k home. You would hit the breakeven horizon after 6.75 years of ownership.
Of course, the benefits of homeownership can far exceed the financial pros and cons. Homeowners benefit from stability, privacy, equity and – in some cases – passive income from rental units.