It’s official: in most of the U.S., renting is cheaper than buying a home. The average home price has increased 70% more than average rent prices across the U.S. since 2016, putting homeownership out of reach for many in the most populated cities in the country.
Still, some places are friendlier for first-time buyers looking to invest in a home. Homebay’s latest study of price-to-rent ratios around the U.S. identified a few cities where it’s still affordable, and in some cases favorable, for renters to become owners. Here are some of the findings.
The average monthly mortgage payment is $174 more than the average rent in the U.S. according to the Homebay study.
Understanding a city’s price-to-rent ratio helps potential buyers determine if their purchase will save them money. The price-to-rent ratio compares the average monthly rent to monthly mortgage payments in a metro.
The national average price-to-rent ratio is 18, calculated by dividing the median home price by the median annual rent. 45 out of the 50 most populous urban metro areas have a price-to-rent ratio over 15, meaning it’s better to rent than to buy.
Home Prices Have (Mostly) Increased Faster Than Rent Prices
Housing in America is only getting more expensive, but home purchase prices have increased more quickly than rent prices.
The Federal Reserve brought interest rates to historic lows amid the COVID-19 pandemic. Many homebuyers wanted to take advantage of these rates, driving up demand for real estate.
In some cities, however, it’s not that simple. Rent prices grew faster than home prices in half of the cities in the Homebay study from January 2022 to January 2023. Affordable cities like Louisville, Ky., saw rent increases of up to 10% as demand grew for rental units.
Pittsburgh Has the Lowest Price-to-Rent Ratio
It’s more cost-effective to buy rather than rent in cities with a low price-to-rent ratio. Pittsburgh’s price-to-rent ratio is 12, the lowest on the list in the Homebay study.
The average rent price in Pittsburgh is $1,333. Home prices in Pittsburgh are also well below the national average, at $188,419, making it the best city in this study for buyers.
The South is Still the Most Affordable Region to Buy a Home
Half of the 18 cities with the lowest price-to-rent ratios are located in the Southern U.S. These cities include New Orleans, Memphis, Miami, Oklahoma City, St. Louis, Tampa, Birmingham, Houston, Louisville, and Atlanta.
Home prices in Miami and Tampa have increased quickly, but remain affordable compared to the rest of the country. Miami’s average home price is $444,989, the most expensive of the group. The remaining cities have a typical home value that’s well below the national typical home value of $416,165.
In San Jose, Renting Beats Buying
Some of the most populous U.S. cities are also the most expensive for homebuyers. It’s better to rent in many popular West Coast urban metros, according to Homebay. At the top of the list is San Jose, Calif., with a price-to-rent ratio of 38.
That doesn’t mean rent in San Jose is low, just that it’s more cost-effective to rent than pay a mortgage. The typical rent in San Jose is $3,181, the most expensive on the list, and three times more than the lowest typical rent in Milwaukee. Still, a typical home in San Jose lists for more than $1 million, not factoring in closing costs and commission fees that make renting preferable.
It’s Better to Rent Than Buy in Many Tech Hubs
Many West Coast cities that have become popular among tech workers have price-to-rent ratios above 21. It’s cheaper to rent in San Francisco, Seattle, Denver, Salt Lake City, Los Angeles, Austin, and Portland Ore. than to buy.
Technology companies brought high-paying jobs to cities like San Francisco and Seattle in the early 2000s, driving the average home price. Now, with many remote tech workers moving to lower-cost cities like Denver, Austin, and Salt Lake City, those metros feel the sharp increase in home purchase prices.
Nationally, It’s Still Cheaper to Rent Than to Buy
Comparing rent prices to mortgage prices is one way the study determined whether it was better to rent or buy. Three California cities – Los Angeles, San Francisco, and San Jose – have the largest differences between monthly mortgage rates and typical rent. In Los Angeles, renters can save around $3,000 a month renting instead of buying.
Rent prices are within 20% of typical mortgage payments in 22 out of the 50 metro areas in the Homebay study. Other variables, such as home value fluctuations, interest rates, and additional costs of homeownership, also impact mortgage payments. Nationally, renters typically save $174 a month.
It Would Take 166.3 Months of Rent to Save for a Typical Home
If you’re saving money by renting, it still might be a while before you have enough in the bank to buy a home. The Homebay study found that, on average, it would take 166.3 months, or almost 14 years, for a typical renter to save enough money for a down payment.
In more expensive markets like San Jose’s, buying a home would take nearly 38 years of rent. That does not include the additional cash needed to cover fees or any surprise maintenance.