Higher mortgage rates have turned the housing market upside down, making renting a home more affordable than buying in California – and much of the nation.
It’s an about-face after below 3% mortgage rates made buying a better choice than renting the past year in many markets, including some in California, as both home prices and rents skyrocketed from Crescent City to El Centro.
But the buy vs. rent debate could be narrowing, as home prices and mortgage rates inch lower – and rents remain stable, according to the annual report from ATTOM Data.
‘WHAT A DIFFERENCE A YEAR MAKES’
For now, buying is more affordable – and a wiser financial move – from San Diego to the Wine Country. Consumers can save several hundred or even a few thousand dollars every month by leasing a three-bedroom home rather than purchasing a median-priced, single-family home with a mortgage.
“What a difference a year makes,” says Rick Sharga, executive vice president of market intelligence for ATTOM. “Last year, our study concluded that it was more affordable to own than to rent in 60% of the markets analyzed. But with mortgage rates doubling, monthly payments for new homeowners rose by 45% to 50% compared to a year ago, even though home price appreciation has slowed down dramatically.”
Go ahead, blame The Federal Reserve for its historic interest-rate hikes during the past nine months and slamming the brakes on consumers’ dreams of homeownership, at least for now. Despite falling mortgage rates the past few weeks, buying is out of reach for a large majority of wanna-be homeowners.
BUT … (AND YOU KNOW THERE WOULD BE)
Please keep in mind, the buy vs. rent comparison is based on the average rent and the median home price – and consumers can often find cheaper housing whether they are buying or renting.
Also, buying a home has advantages, like the tax benefits of mortgage interest, and disadvantages, such as a leaky roof or water heater and other maintenance issues.
It’s best to crunch the figures and consider what best fits your budget, lifestyle and long-term needs.
DIGGING DEEP TO PAY THE RENT – AND MORTGAGE
Fewer than one of every five (18%) Californians could afford to buy a home during the third quarter, down from 24% a year ago – and far from the record 56% rate in fourth-quarter 2012, according to the California Association of Realtors.
ATTOM’s annual buy vs. rent report found similar results, albeit with a different model – the percentage of monthly income the average wage earner would need to rent a three-bedroom house compared to the monthly mortgage payment for the median-priced home with a 20% down payment.
For example, the average worker would need to spend 40% of their paycheck to rent a three-bedroom home in Sacramento County, compared to 63% to purchase a house. The state’s capital region had one of the closest comparisons between money for rent compared to a mortgage payment.
In some counties, such as Orange and Ventura, every dollar – and then a few more – were needed for the average worker in the respective county to make the mortgage payment (please see chart below for data on 10 regions in the state).
SILICON VALLEY BOASTS CHEAPER RENT THAN BAKERSFIELD
Silicon Valley had the largest disparity of percentage points between dollars needed to pay the rent vs. the mortgage payment at 55 points (28% vs. 83%, respectively.) Silicon Valley boasts the best-paid Californians – at least until the latest tech layoffs at Google parent Alphabet, Facebook parent Meta, Salesforce and many others – so the $4,000 rent was more affordable compared to the $1.7 million home.
Silicon Valley was the only region that had average rent below 30%, often considered the maximum amount consumers should pay to avoid being “cost-burdened” by housing expenses. However, a large majority of Californians exceed the 30% limit if they own or rent, regardless of whether they live in the Bay Area or Bakersfield.
Speaking of Bakersfield, the Central Valley city had the narrowest affordability gap between rent and mortgage payments at 44% vs. 54%, respectively. But, again, the average employee needs to spend almost half of their paycheck on rent in Kern County.
The age-old buy or rent question could flip again in the coming months, as rent hikes are exceeding home price increases, which have declined in the past few months, according to CAR and CoreLogic.
However, rent growth has also already started to slow and will be far from the double-digit percentage increases of the past two years, said Jeff Adler, vice president and general manager of Yardi Matrix. The industry-tracking firm has downgraded its closely watched rent forecast to 2.6% from 3.1% nationwide in 2023, largely because of lower lease rates in several markets, including the Bay Area and eastern Los Angeles County.
Renting a three-bedroom house vs. buying a median-priced home in 10 regions in California — and how much it requires from the average worker’s paycheck
| City | Rent for house Nov. 2022 | Annual % rent increase | %of the average worker’s paycheck | Home price Nov. 2022 | Annual % price increase | %of the average worker’s paycheck |
|---|---|---|---|---|---|---|
| Bakersfield | $1,995 | +24.7% | 44% | $330,000 | +10.0% | 54% |
| Fresno | $2,195 | +15.8% | 50% | $392,000 | +12.0% | 63% |
| Los Angeles | $4,000 | +5.3% | 64% | $892,000 | +6.8% | 98% |
| Orange | $4,500 | +32.5% | 73% | $1.15 million | +15.2% | 125% |
| Riverside | $3,495 | +16.5% | 77% | $585,000 | +11.4% | 89% |
| Sacramento | $2,400 | +9.1% | 40% | $530,000 | +9.3% | 63.2% |
| San Diego | $3,900 | 14.9% | 63% | $900,000 | 11.5% | 99.4% |
| San Francisco | $5,200 | +14.4% | 41% | $1.69 million | -0.8% | 92% |
| San Jose | $4,000 | +8.1% | 28% | $1.7 million | +10.4% | 83.2% |
| Ventura | $3,600 | 16.1% | 68% | $861,125 | +9.1% | 109% |
