The Relief And Horror That Renting Is More Financially Sound Than Buying

Renting v. buying: whichever wins, we lose

In the world of housing, something unusual has happened: in most situations, for most people, renting is now more financially sound than buying a home.

Obviously, there are still situations where it makes sense to buy. But as both the New York Times’ David Leonhardt (who helped create the wonderful rent vs. buy calculator this blog has referenced before) and the Economist write, high mortgage rates and stubbornly high home prices have skewed the math heavily in favor of renting.

Leonhardt and host Michael Barbaro discuss on the NYT Daily podcast:

Michael Barbaro: So if you’re somebody thinking about buying a home right now, should you just pretty much give up on the idea, give up on the idea that has been seen as a ticket to adulthood and a reliable path to creating wealth, and just accept that you’re going to be a renter?

David Leonhardt: Yes. For most people, the answer is yes. You should give up on the idea. You shouldn’t feel bad about it. Renting has this unfair stigma in this country.

Leonhardt goes on to say that this doesn’t mean nobody should buy right now, or that you’ll never be able to buy. Either mortgage rates or housing prices will eventually drop, probably, maybe, who knows, and then buying can return to its rightful place as the more sound financial choice.

But right now, buying a house is very expensive. Why? As Leonhardt describes, despite high mortgage rates (which normally force sellers to lower prices to attract buyers), home sellers have simply pulled homes off the market until they can get the price they want. This leaves those looking to buy with the double whammy of sky-high home prices and 7%+ mortgage rates. Unless you know you’re gonna be staying in the house for a long time, Leonhardt says, the math is stacked in favor of renting.

When I listened to this episode, I felt one part relief.

You pay rent in both money and guilt. As someone who’s rented my entire adult life, I’ve always felt that I should be buying a home. My parents regularly drop hints that I should. They ask “soooo how's the SF housing market doing?” as if it were a girl they wish I would ask out. The guilt accumulates. Renting starts feels like flushing a nicely-bound stack of hundreds down the toilet, twelve times a year. Even if you can’t cover a down payment, even if each mortgage payment would cost half your monthly income, even if the market looks like a giant bubble begging to burst, you hear a voice whispering to buck up and take out a $700K loan because it’s the financially sound thing to do.

Actually take out two loans, think about it, it diversifies your risk

I know I’m not alone in feeling, perhaps unfairly, rent-based shame. In a previous post, I suggested that renting could be better than buying in some scenarios. I was flooded with comments suggesting that actually buying is better, no contest. Some comments rightfully pointed out hidden strengths of buying, like the ability to refinance at a lower interest rate. But other commenters were in full-blow denial that renting could ever be more financially sound, regardless of interest rates or house price changes. In this mindset, buying is better than renting almost by definition.

So hearing that renting is financially sound was something of a relief. I could let go of my rent-based shame. I could ignore the voices telling me to buy a house, whether they were my parents or online commenters or early-stage schizophrenia. I could keep calm and rent on, at least for now.

I also had another, opposing thought: this is really bleak, right?

In 2022, Moody’s reported that the average American family was spending more of their income on rent than ever before. That year, the rent-to-income ratio crossed 30%, the highest value ever since they started tracking it in 1999. Spending more than 30% of your income on rent is traditionally considered “rent-burdened”, so you could reasonably interpret this as saying that the average US family crossed the threshold to become rent-burdened in 2022.

(This value dropped ever so slightly in 2023, but it’s still at the highest value seen outside of 2022.)

For another angle of the same idea, rent growth has outpaced income growth in the US by nearly 2x over the last 25 years. Wage increase are not keeping up with rent increases, which makes total sense given the record percentages of income spent on rent.

In short, renting takes more of your money than ever. And yet, somehow renting is also a better deal than buying! The current state is not a testament to the incredible value of renting, but rather evidence that home prices have become completely unhinged.

And indeed, buying has become ludicrously expensive. According to this analysis, the median monthly mortgage payment on a single family home is now 46% higher than the median monthly rent on the same.¹ That’s 46% more than rents that are near record highs, both in absolute terms and as a percentage of income. And yet somehow a monthly mortgage is still even worse.

Leonhardt notes that renting > buying is probably a temporary scenario. Mortgage rates and home prices may fall in the coming years, he says, making buying the better option.

As the Economist points out, though, there’s another, darker option that would make buying the ‘better’ option again: rents rise even higher. The Economist deems this “unlikely”, but I deem it “terrifyingly plausible”. Given the trajectory of home prices/rent over the last twelve years and our communal reluctance to build enough to counteract it, I can see the following happening:

1. Build nothing

2. Charge higher rents than ever

3. Note that buying is better than renting again

4. Mission accomplished, no more complaining about housing

Okay, maybe this is paranoia. The political world has finally noticed that extremely expensive housing has downsides. The YIMBY movement has done a lot to incentivize building new housing and housing affordability. And, maybe, just maybe, a secret cabal of Georgists will reveal that they’ve infiltrated all levels of the US government and finally pass that land-value tax. I hold out hope that we can avoid the scenario where buying stays bad and renting gets worse.

But even if rents ‘just’ stay at their current levels, they’re still near their highest point in the last 25 years. In good situations, yes, renters can save money while they rent. For many people, though, rent remains such a large chunk of income that it siphons away money from saving and investing, which makes it hard to pool enough money to eventually buy a home. Exorbitant rents now make it hard for current renters to become future homeowners later.

So while it’s a relief that renting is a sane option, and I also feel the whole situation reflects terribly on us as a society. Regardless of which option is technically ‘better’, both buying and renting have grown extortionate. Whichever option you choose, you’ll pay more now than ever to not be homeless. On a personal level, it’s good to know that renting is the best option right now. On a society-wide level, it’s pretty damning that the best option is also a bad one.

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If you liked this post, check out Maybe Treating Housing as an Investment was a Colossal, Society-Shattering Mistake.

1. Note that I don’t think this controls for the size or quality of house, so it’s not a perfect comparison. However, you can see in the chart that for most of the last 30 years, these values were close.