MW One reason why renting is better than buying - for now

By Aarthi Swaminathan

Younger generations may rent for longer since it's the 'only affordable option,' economist says

The rent-versus-buy debate has a winner - for now.

After instituting huge rent increases over the past few years, landlords have taken a breather and allowed renters' wages to catch up, making it much more affordable to manage rental costs, according to new analysis from Redfin $(RDFN)$, a real-estate brokerage.

In other words, many renters are catching a much-needed break. Asking rents have backed off all-time highs set in August 2022, falling from $1,700 to about $1,600 for a typical apartment, the company said. To comfortably afford that, the average renter needs to earn $63,680 annually, the lowest figure in three years.

Renters can expect a relatively calm market in the months to come. "Rental affordability will continue improving this year, as wages grow and rents remain flat, thanks to the recent boom in apartment construction," Sheharyar Bokhari, a senior economist at Redfin, said in a statement.

An apartment is considered affordable if a renter spends no more than 30% of their income on rent.

Housing market out of reach for many buyers

These trends in the rental market stand in stark contrast to those in the for-sale market. The barrier to entry for homeownership is high as home prices continue to climb to new heights and rates remain at 7%, a threshold that spooks most prospective home buyers. The typical home sold for $406,100 in November, the latest month for which data are available, and a buyer would have to at least earn six figures to comfortably afford that.

To afford a $400,000 home at a rate of 6.9%, assuming a 10% down payment, a buyer would need to earn a household income of nearly $125,000 to qualify for a mortgage, Lisa Sturtevant, chief economist for Bright MLS, said in a statement. The median household income in the U.S. is just $80,000, and the typical renter household has an income of just over $51,000, she added.

Higher rates in particular are expected to keep home sales at multidecade lows as buyers struggle with affordability, according to Fannie Mae (FNMA). The agency, which backs one in four residential mortgages in the U.S., expects the 30-year rate to end 2025 at 6.5%, an upward revision from 6.2% in its previous forecast. It also expects existing-home sales to remain at low levels.

Rents are falling in some markets

Fed up with the cost of buying a home, many younger people have turned to renting in the meantime. The slower rental market is likely to be a welcome development.

Even though renters may be losing out on the opportunity to create wealth through homeownership, rent prices have been more affordable than they were in recent years. Particularly after the postpandemic surge in rents between 2021 and 2022, when renters saw prices soar to new records, monthly rents have stalled. The national median monthly rent in December was 0.6% lower than it was in December 2023. In other words, the typical apartment is renting for slightly less than it was a year ago, according to Apartment List, a rental-listings platform.

Broadly speaking, renters are also earning more than they were before the pandemic. The estimated median income for a renter was about $55,000 in 2024, up 35.2% from 2019, Redfin said. While that amount still falls short of what is needed to afford the monthly median rent, it shows how the rental market is becoming more affordable as prices remain steady or even fall in some markets.

Texas cities dominated the rankings of the most affordable rental markets. Mostly due to a building boom, median asking rents in cities like Austin, Houston and Dallas were below $1,500 a month, Redfin said. Austin was also dubbed "the nation's softest rental market" by Apartment List earlier this month.

Though most major cities on the East Coast remain expensive, even renters in New York City caught an unusual break. The median asking rent in December in New York was still high at $2,800, but the income required to afford a median-priced rental dropped from the same month a year earlier. This past December, renters needed to make $112,000 to comfortably afford the median asking rent, while in December 2023 that figure was close to $118,000.

Even if renters lose out on building wealth and capturing home-price appreciation, the relatively lower cost of housing has offered some people a safe harbor as the overall cost of living has increased rapidly.

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Potential home buyers could be renting for longer

To be sure, many renters continue to struggle with high housing costs. The number of renters who were cost burdened - meaning they spent more than 30% of their income on rent and utilities - rose to an all-time high of 22.6 million in 2023, research from Harvard University's Joint Center for Housing Studies found. That figure made up almost half of all renter households, the organization said.

Nonetheless, experts say, renting is still a better option for most people than buying a home - for now.

"The affordability gap between renting and buying is likely to widen further in 2025, as home prices rise and mortgage rates remain high," Redfin's Bokhari said. "That means potential homebuyers - especially from younger generations - may decide to continue renting for longer, as it's the only affordable option."

-Aarthi Swaminathan

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January 22, 2025 13:38 ET (18:38 GMT)

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