Housing Market Decoded: Why 'rent vs buy' misses the big picture 

Decisions in residential real estate are often based on market data — sometimes conflicting, often confusing. Housing Market Decoded, authored by economists and other market experts, helps put the data in context so you can make sense of the numbers.

With home prices continuing to rise, many prospective buyers are left wondering if the math pencils out, especially compared to renting.

Deciding whether to buy or rent a home should be guided by an individual's personal finances and priorities. But, in this current environment, as people are simultaneously worried about missing out and about buying at the top of the market, lists and calculators that put the buy-versus-rent tradeoff in black and white can be appealing.

But the decision is often more complicated, and agents can help their clients understand the numbers — and the many other factors that go into buying a home.

The numbers

Realtor.com recently released their July 2024 rental report that showed that renting is a more affordable option than buying in every one of the nation's 50 largest metros. Bankrate's analysis came to the same conclusion. ATTOM Data Solutions provided a little bit of a silver lining for prospective homebuyers, with their analysis showing that renting is a better deal than buying in all but 10% of local markets across the country.

The data on the "is it better to buy or rent" question has shifted dramatically from just a few years ago. There is no doubt that mortgage rates and home prices have both increased, making buying a home more expensive, while at the same time, record numbers of new apartments have come onto the market, easing rents. But the fact of the matter is that there are a lot of considerations that go into deciding whether buying or renting is better financially, and the situation will vary for individuals.

The limits of lists

At the most basic level, identifying the metropolitan areas where it is relatively better to buy than to rent is based on comparing the median monthly cost associated with buying a home with the median monthly rent. Typically, the monthly owner costs include not only the mortgage payment but also taxes, insurance and homeownership association fees. Sometimes these lists include only certain types of homes (e.g., 3-bedroom homes or entry-level homes); others take a more general look at the market.

These lists can be interesting to read, but they are not very useful for an individual or family trying to decide whether buying or renting is right for them. These metropolitan-level estimates typically use one median value for home prices and rents, which does not take into account the wide variation in housing costs across a region. In addition, these simplistic calculations do not factor in the upfront costs associated with buying a home, the time horizon for ownership or the additional maintenance expenses associated with homeownership.

You can't calculate 'pride'

Online buy-versus-rent calculators allow consumers to input more personalized, detailed information to see the tradeoffs between buying and renting. These calculators are available from banks and credit unions, real estate portals, financial planners, mortgage companies, personal finance and other media — even AARP has a calculator. And they all generally use consumer-provided data on home price, down payment amount, mortgage rate, closing costs, homeowners' insurance, property taxes, HOA/condo fees, expected home value appreciation and expected tax benefits. On the renting side, the most comprehensive calculators use data on monthly rent as well as expected rent appreciation. The models then typically show how long an individual or family would have to live in a home to make buying a better financial decision than renting.

These calculators are fun to play with and can be part of the first steps for prospective homebuyers examining their options. But even taking into account a wide array of financial factors, there are so many other reasons people want to become homeowners.

In a recent survey, the ability to make a home one's own, stability and general "pride of homeownership" were the most important reasons renters gave for wanting to become homeowners. Homeownership is associated with better physical and mental health and better educational performance for children. Homeownership has also been shown to increase social and civic engagement. These are all things that are hard to include in a standard buy versus rent calculation.

Dr. Lisa Sturtevant has been involved in research on economic, demographic and housing market issues for more than 20 years. She is currently Chief Economist at Bright MLS, where she leads research and forecast activities for Bright and serves as a thought leader on the housing market. The views expressed in this column are solely those of the author.