Renting vs. buying by market — how to determine the best path for you
June 2, 2022 • 5 min read
What we'll cover
Benefits and drawbacks to owning a home vs. renting
What to factor into your decision to rent or buy
Price-to-rent ratios for some major U.S. cities
If you’ve been on the fence about whether you should rent or buy, you’re not alone. The housing market has been ultra-competitive with sky-high prices in many locales. However, the cost of renting has also been steadily increasing in many areas, with rents up in more than 90 percent of the nation’s largest cities by an average of more than 25 percent compared to last year.
Still, across the 50 largest metropolitan areas in the United States, renting is typically less expensive than owning a home — until you’ve paid off the mortgage, at which point owning will become the cheaper option. Not sure which choice is best for you? Consider the pros and cons of renting vs. buying to determine the best option for you and your family.
Analyze all angles
From your lifestyle to your budget to your five-year plan and beyond, the decision to rent or buy depends on a complex set of factors.
First and foremost, as you consider your options, think about your plans for the near- and long-term. Buying a home can be a wise investment for your future, but time is a factor. On average, buying a home is the cheaper option after six years.
Renting can offer more freedom and flexibility while buying a home comes with more responsibility. As a renter, you don’t have to worry about repairs and maintenance, and you’re usually only bound by a one-year lease. So, if you could see yourself experiencing a major life change (like moving to another city, a major career change, getting married or having kids) renting may be the better option to stay flexible. On the other hand, as a homeowner, you’re on the hook when a major expense like a new furnace or a leaky roof comes up, but you have free rein to renovate and change your home as you please.
Although your monthly loan payment or monthly P&I may be lower (and more predictable) as a homeowner, you should also account for additional expenses such as property taxes, homeowners insurance, maintenance, repairs and utilities. Don’t forget that if you’re home is part of a homeowner’s association (HOA), you may also have to pay monthly fees and assessments, which can unexpectedly increase. When you purchase a home, you’ll also be faced with a number of one-time costs, including a down payment, home appraisal fee, home inspection fee and closing costs.
While that’s quite a list of expenses, remember there is a payoff. You’re building equity as a homeowner, which can help you build wealth, and you’ll also get tax benefits. And in some ways, it can be easier to budget around home payments. Your mortgage payments will stay the same, while as a renter, your landlord may choose to raise your rent.
Mind your market
Although renting is cheaper in most U.S. cities, the disparity is greater in some than others. Checking the price-to-rent ratio can help you gauge the overall market. This useful digit is calculated by dividing the median home value in a given market by the median annual rent. The higher the ratio, the more expensive it is to buy a home in that city.
For reference, take a look at the cost of renting vs. buying in these popular U.S. markets.
Median home value: $390,396
Price-to-rent ratio: 23.83
Median home value: $388,437
Price-to-rent ratio: 17.89
Median home value: $315,196
Price-to-rent ratio: 20.22
Median home value: $261,791
Price-to-rent ratio: 14.90
Median home value: $600,254
Price-to-rent ratio: 28.28
To put those into perspective, the U.S. cities with the highest price-to-rent ratio are San Francisco (51.79), Oakland, California (42.06) and New York (38.26). On the other end of the spectrum, Milwaukee (12.87), Memphis (10.46) and Detroit (5.67) all have price-to-rent ratios below 13, which may make them more favorable to buyers.
Considering these ratios can be helpful, but don’t disregard the face-value figures. In cities where both the rent and home prices are high, you might be priced out of the market altogether, regardless of the ratio. For instance, the median home value in Los Angeles is $697,200, more than double the national median value of $344,141. With a median annual rent of $18,644 (price-to-rent ratio of 37.39), it’s certainly cheaper to rent, but it still may be unaffordable to many.
If you’re considering buying a home in an area where the gap between renting and buying is not as dramatic, purchasing a house could be a good option if it fits your plans and lifestyle, since you’ll be building equity while not paying much more than you would in rent.
Buy or rent – choose carefully
Although it’s cheaper to rent than buy in the 50 largest metropolitan areas in the U.S., that’s not the full story. Some markets have a bigger disparity in costs than others. Before deciding if renting or buying makes the most sense for you and your circumstances, you also must consider your lifestyle, timing and the additional costs associated with homeownership. Weigh all your options and map out your budget to find the right fit for your next living arrangement.