Rising home values and higher mortgage rates have dampened the buying appeal, but they’ve also reached a point where savings in monthly costs diminish, or even evaporate, for some renters who plunge into homeownership.
Higher price tags have eroded some of the financial incentives to buy a home versus renting a home for most buyers, A.J
Monthly cost analysis provided for Barron Offers. And the math is even worse for first-time buyers.
Buyers who buy a typical home with a 20% down payment have seen their savings shrink compared to rents since 2019, while those with a 5% down payment face monthly mortgage costs that are generally higher than rental prices. Zillow data used the 30-year average fixed-rate mortgage rate and two Zillow indices, one that measures typical home value and the other that measures typical rent, to determine the base monthly payments.
This shift is unwelcome for first-time buyers, who the data suggests typically make smaller down payments. While the typical down payment for a repeat home buyer in 2022 was 17%, first-time buyers typically only pay 6%, according to National Association of Realtors data.
Zillow data showed that in July 2019, a home buyer who cut 20% and had the average mortgage rate would save nearly $700 in monthly costs compared to the typical rental price. By July 2023, the buyer’s savings relative to leasing was only $237.
Those small monthly savings turn into losses when you make a purchase with a smaller down payment. In 2023, someone who buys a typical home at an average mortgage rate 5% lower will pay $330 more per month to do so than they would for a typical rent, according to Zillow data. In 2019, even those buyers stood to save hundreds per month on rental costs.
The difference in monthly costs can help explain why some renters are hesitant to make the leap into homeownership. Record share of tenants who responded
The housing market sentiment survey for July said they would rent rather than buy if they moved.
“Some of those people who are on the cusp of that decision—in that age range where they might be considering buying their first home—maybe run those numbers and say, ‘Homeownership probably isn’t right for us right now,'” says Jeff Tucker, chief economist at Zillow.
First-time buyers have had a difficult experience in the housing market in recent years: A first- and second-blow from rising home prices and mortgage rates has pushed homeownership out of reach, according to National Association of Realtors Affordability Index data published at the time. Previous this week show.
In fact, the group accounted for 26% of all transactions in 2022, the National Association of Realtors found — the lowest annual share on record. Monthly data shows a slight improvement, with the group accounting for 27% of all sales in June, the latest month for which data is available.
Leading indicators offer little reason for optimism: Mortgage rates rose to a level just under 7% last week, according to
The Mortgage Bankers Association index, which tracks home loan applications, has fallen for four consecutive weeks. “Homebuyers continue to struggle with low inventory to sell and high mortgage rates,” Joel Kahn, deputy chief economist for the trade group, said in a statement.
Higher rates have reduced the number of homes on the market, driving up prices. As a result, sales are down broadly as a result Existing home sales have been tepid this year, according to National Association of Realtors data.
This is not to say that homeownership has lost its broader appeal: monthly costs are only a small part of the factors buyers consider when they begin their search, but they serve as a simple starting point for comparison purposes. As evidenced by the recent annual gains in new home sales and home builder feedback, there is still a lot of demand for homes, especially when buyers feel they are getting good value for the price.
While the rent-to-buy formula has changed, the other financial perks of homeownership remain: While renters’ monthly payments leave their wallets for good, monthly payments help homeowners build equity that can act as a cushion down the road. With that said, the tax benefits of buying a home Reduced by the Tax Cuts and Jobs Actstill offer some incentives.
Mortgage payments provide relative stability compared to leasing, since the relatively short duration of leases means that monthly payments to tenants are unpredictable beyond the current lease term. “That kind of stability and hedge against inflation (and) higher rents continues to really attract people,” says Tucker of Zillow.
Jay Liebeck says:
National director of multifamily analytics. Life events, such as marriage, tend to have a more significant effect on consumers’ decision to buy a home than monthly costs do on rent, Liebeck says.
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