Advantage Varies by Metro Area
Apartment rents have been rising steadily for the past seven years, even as supply reaches peak levels for this cycle. Meanwhile, the price of single-family homes continues to increase, with very little inventory from which to choose.
Finding a good apartment for less than $1,000 per month is difficult in many metro areas and well neigh impossible in the most expensive markets. The national average effective rent in May was $1,260, according to Axiometrics apartment market data, and the median price for an existing single-family dwelling was $252,800 at the end of May.
Which begs the question, is it less expensive to rent or buy these days? Apartment market analysis from Axiometrics and single-family data from the Census, National Association of Realtors and the Federal Reserve Bank shows that nationwide, the average monthly cost of renting has been higher than the average monthly single-family mortgage payment since 2009.
(The monthly mortgage payment for purposes of this article comprises principal and interest, with 5% added for taxes and insurance, and assumes a down payment based on the typical down payment that year: 3% during boom years, 20% in bust years and 10% for the most recent quarter. Mortgage rates are determined by market averages.)
As the chart below shows, the premium to rent vs. buy has been diminishing for the past five years. Where it was 35.3% more expensive to rent in 2012, renting was only 4.7% costlier in the first quarter of 2017. The tables are expected to turn by the end of this year, when Axiometrics forecasts a 2.2% premium to buy vs, rent. We predict the trend will remain that way through at least 2021.
That’s just the national picture. Individual markets vary considerably, as seen in the chart below.
So, you definitely want to rent in Anaheim and San Jose — as well as most other Western metro areas. The average mortgage payment in Orange County, CA was 83.7% higher than the average monthly rent, which in this case translates to a $1,653 difference. San Jose’s average mortgage payment was $2,213 higher than average rent, an 80.9% premium to own. Of course, when the average mortgage payment is $4,951, as it is in San Jose, the premium is bound to be high.
The average mortgage payment is at least 20% more expensive than average rent in San Diego, Denver, Las Vegas, Salt Lake City, Colorado Springs, Portland and San Francisco.
On the other end of the spectrum, you’ll probably want to buy if you live in Midwestern and Eastern Seaboard metros. Cleveland homeowners pay an average of $314 less per month than Cleveland renters, a 34.3% difference, while Chicago’s difference is $501, or 31.8%. Rent is 20% or more costly than mortgage payments in Bridgeport, CT; Cincinnati; Philadelphia; Atlanta; and St. Louis.
Markets in the middle of the pack – with less than a 5% difference in either direction — are concentrated in the South and Southwest. They include South Florida, Houston, Charlotte, Oklahoma City, Greenville, Nashville, Birmingham and Dallas-Fort Worth.
What is our view based on?
Despite the increase in home prices, structural and equilibrium issues surrounding the single-family market remain. Mainly:
- Home prices are up primarily because of lack of supply, rather than robust demand.
- First-time homebuyers remain on sidelines.
- Structural issues surrounding the single-family market remain: Marriage and children are taking place later in life; household debt remains high for young adults; requirements to obtain a mortgage are simmering down but getting a loan remains hard.
- The biggest hurdle for the single-family market could be depicted by the substantial decrease in the current homeownership rate compared to the last peak and even annual average. The taste and preferences of households have shifted toward renting, rather than buying. The “American Dream” to own a home and use it as an investment vehicle seems no longer to be true.
The decision to rent or buy is a personal one and takes myriad variables into account. But, if you were to choose based solely on economics, the outcome would rest on where you’re planning to live.
Axiometrics expects apartment rent growth to revert to the long-term average this year, according to our apartment market forecasts, but home prices are not showing any signs of slowing. However, after this year, expect home prices to somewhat moderate but apartment rent to start on a higher growth path once again.
This will still make the premium to buy a bit higher since the magnitude of growth on home price is expected to be higher than apartment rent. The relationship, in our view, is expected to move back to those seen before housing boom and bust.
What this tells us is that the health of apartment market is expected to remain above average through our forecast period even though apartment rents are not as robust as those seen during the last recovery after the Great Recession.
By K.C. Sanjay | AXIOMetrics | Wednesday, June 28, 2017
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