Buy or rent? Study shows what is better today

The probability that Real estate prices will rise reverses the calculation in favor of Buy instead of rent in more than half of the 50 markets studied by First American Data & Analytics.

The typical calculation between renting and buying does not take into account the equity building that is the main benefit of homeownership, explained Odeta Kushi, deputy chief economist at First American, in a blog post.

“After accounting for total monthly homeownership costs and comparing them to average rent by market, renting was the better financial choice in 48 of the top 50 markets during the second quarter,” Kushi wrote. “However, when accounting for equity created by home appreciation, owning a home was more affordable in 29 of the top 50 markets, including the two most expensive rental markets, San Jose, California, and San Diego.”

But San Jose is also the most expensive market in the country, as it is the first with a median home price of over $2 millionaccording to current data from the National Association of Realtors.

A $1.1 million home in San Jose is in the 25th percentile of local home prices, according to First American Data & Analytics. If a buyer puts down just 5 percent on a 7 percent mortgage rate, their monthly principal and interest payment will be $7,000, plus an estimated $2,500 for taxes, repairs, private mortgage insurance and homeowner’s insurance costs, Kushi said. That brings the monthly cost of ownership to about $9,500.

However, prices in the San Jose market rose nearly 8% year over year in the second quarter, representing an equity benefit to homeowners of about $7,300 per month, for a net cost of $2,151.

The average monthly rent cost in San Jose is $2,732, Kushi said. The difference between those two figures is $581 per month

Austin, Texas, was the only market in the analysis where annual home prices declined, and a similarly located property in the 25th percentile would be worth $355,600. The buyer would lose $350 per month in equity value due to these falling values. As a result, the median purchase cost of $3,618 was much higher than the median rental cost of $1,530.

In San Francisco, average monthly rental costs are the second highest at $2,335, but ownership costs are also the highest at $3,821.

Denver had the third largest difference in favor of rent at $1,470 per month.

The largest differences between homeowners and renters are in Providence, Rhode Island at $1,554 per month, Hartford, Connecticut at $1,240, and Cincinnati at $1,039.

“For those looking to buy a home, price appreciation can be intimidating and make the purchase more expensive,” Kushi said. “However, once the home is purchased, the appreciation helps increase the value of the home and becomes an asset rather than a cost.”

Kushi had some advice for Generation Z. Previous studies have shown that 40% of members plan to buy a home in the next three yearsbut affordability is an issue. That is why many consider house hacking structures like like shopping with friends.

“Despite the rise in property prices, this analysis shows that the wealth-building effect of home equity should not be ignored when deciding between renting and owning,” said Kushi. “Given the uncertainty in the property market, one thing remains clear: the long-term financial benefits of home ownership can make it a worthwhile investment.”

Separately, the company’s home price index for July showed slowing growth for the seventh straight month, with prices rising 0.3% from June and 5.5% year-on-year.

“In markets that are relatively affordable, homes remain more accessible compared to other major markets, making them attractive to buyers who cannot afford more expensive regions despite rising prices,” said Mark Fleming, chief economist at First American, in a press release. “In contrast, home prices are slowing significantly in other markets, with prices falling in cities like Austin and Tampa, Florida.”

The HPI report found that prices in Austin were 1% lower compared to July 2023, while they fell 0.9% in Oakland, California, and 0.7% in Tampa.

The biggest stock gainer among the cities monitored by First American was Anaheim, California, with an increase of 9.9 percent.