First-time HomebuyersReal Estate

Volatile mortgage rates keep renters from buying homes

The gap between starter homeownership costs and rents widened by 25.5% from January to June

Higher mortgage rates are making potential buyers reconsider homeownership, a monthly rental report published by Realtor.com found.

As a result, more than three-quarters of people surveyed in the 50 largest metros favored renting in June, compared to just under half those markets in January, the report said.

Danielle Hale, chief economist at Realtor.com, said the rising cost of financing a home is a “clear driver of rental affordability.”

“In fact, our analysis shows that if not for higher mortgage rates, the rent versus first-time buying gap would have shrunk in the first half of this year, as rents grew more quickly than starter home prices,” Hale said.

Mortgage rates have notably fluctuated following the Federal Reserve‘s interest rate hike of 75 basis points last month. After falling 40 bps two weeks ago to 5.30%, purchase mortgage rates climbed back last week to 5.5%, according to the latest Freddie Mac PMMS. A year ago at this time, 30-year fixed-rate purchase rates were at 2.88%.  

In reaction to the volatility, the gap between starter homeownership costs and rents widened by 25.5% from January to June, Realtor.com’s found.

Monthly homeownership costs came in 29.9% higher than rents in June, up from 4.4% in January. Higher mortgage rates added $416 to typical monthly starter home costs, the report said.

The median rental price also has continued to climb, hitting a new high of $1,876, a 14.1% year-over-year increase.

Overall, rents were 27.6% higher than in 2020, the report said. Studio apartments were up 15.1%, one-bedrooms were up 13.8% and two-bedroom apartments were up 13.6%.

“While more markets offered relative rental affordability in June than in January, rents are still rising across the country,” Hale said. “Plus, many of the areas that favored renting are among the biggest tech cities, where real estate tends to come at a premium.”

The top rent-favoring markets in June were Austin, Texas; San Francisco; Seattle and New York.

Meanwhile, markets in Pittsburgh, Birmingham, Alabama, and St. Louis, Missouri, showed more preference for homeownership owing to lower prices.

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