Thanks to mortgage rates near 8%, the average monthly mortgage payment has increased to the point where it’s now 52% higher than the typical apartment rent.
That’s according to data from commercial real estate firm CBRE. Articles in both the New York Post and Wall Street Journal explored the latest numbers and comparisons with the 2010s and before, looking as far back as 1996—the last time the buy-to-rent ratio was this extreme.
WSJ’s headline reads, “There’s never been a worse time to buy instead of rent,” which would seem to contradict last week’s confident statement by Barbara Corcoran.
Historically, monthly mortgage payments have cost roughly the same or less than monthly apartment rents. That was the case from 1996 to mid-2003. Then, in the second quarter of 2006, leading up to the 2008 market crash, the mortgage premium peaked at 33%.
After the financial crisis, interest rates took a nosedive as housing supply shot up throughout the 2010s, and, on average, buying a home became 12% cheaper than renting one.
Since then, the skyrocketing cost of debt, as the 30-year fixed rate hit 8%, combined with historically low housing supply, has reversed the ratio.
8% MORTGAGE RATES PLUS HISTORICALLY LOW INVENTORY
Last week, according to Mortgage News Daily, the average 30-year fixed rate reached 8% for the first time since 2000.
As of Wednesday (October 25), rates have slid to 7.90%, but they’ve remained close to 8% for weeks, increasing monthly mortgage payments by hundreds of dollars for today’s borrowers. Those extra Benjamins are why so many buyers have decided to keep renting for now.
As for sellers, about 80% of outstanding mortgages have rates below 5%, giving homeowners an incentive to stay where they are. Even among those looking to downsize, many are holding off because those 8% rates erase the potential savings.
Historically low inventory is also playing a role, propping up home prices as remaining buyers compete for the fewer homes available. Sales of previously occupied U.S. homes were down 22.3% during the first seven months of 2023, compared to the same stretch in 2022.
For perspective, an 8% rate means a buyer taking out a 30-year fixed mortgage on a home priced at $410,200 (the national average for an existing home, according to Bankrate), assuming they make a 10% down payment, would be looking at a monthly mortgage payment of about $3,200—60% more than they would pay on the same house in 2020.
By comparison, rents have increased by 22% over the same three-year period. That figure is still moderately ahead of overall U.S. inflation, but it helps explain why renting is significantly more affordable today in most U.S. markets.
As it is, rents are rising fast enough to make it difficult for renters to save toward a 10% down payment, let alone the monthly toll of today’s higher mortgage rates.
There is a lot of shadow demand for homes, with a bunch of first-time buyers waiting on the sidelines for the payment-to-paycheck calculation to work for them.
Odeta Kushi
Deputy Chief Economist of First American Financial Corporation
A drop in home prices would help restore some balance to the market, but, barring a major recession, that seems unlikely with inventory as low as it is.
