RENTING THE AMERICAN DREAM – CHEAPER THAN BUYING IT?

SFH History … Where We Were, Where We Are … Where We May Be

In this issue I’ll establish the drivers of the Richmond single family home rent-versus-own cost spread … plus identify the forces that could broaden or narrow the gap during the next few years. 

Three Scenarios for SFH Landlords and Investors (Your & My) Consideration …

Where We Were/Where We Are

To make sense of the current state of cost comparisons … SFH rent vs. ownership … a contrast between today and the much lower interest rate and prices of entry-level single-family homes in 2019. The monthly cash cost in the Richmond area has accelerated dramatically above the cost of renting a comparable home.

We’ll address Richmond data as the model while not intending the analysis to represent every neighborhood. It will be useful as an illustration of the same entry-level house in 2019 and 2026 using Richmond’s reported price and rent changes.

The most important finding is that home prices alone did not create the gap. It was the combination of:

1. Home-price appreciation. 
2. Mortgage rates rising from roughly 4% in 2019 to 6.67% today. 
3. Insurance, maintenance and other ownership expenses are increasing faster than rents. 

That combination has created what I would call a historically abnormal “cost-of-entry premium”.

Illustrative Richmond Starter-home Comparison

Comparable entry-level Richmond home, including estimated maintenance. Ownership cost assumes 5% down.

Calibrated to Richmond's reported 2019–2026 price and rent changes. Estimates, not market medians.

In the above illustration:

• Rent increased approximately 18%. 
• The total monthly ownership cost increased approximately 66%. 
• The relationship changed from owning being slightly cheaper to owning costing approximately $700 more per month. 

The spread could easily exceed $800–$1,000 for a buyer with a lower credit score, higher insurance, a smaller down payment or an older house requiring greater maintenance.

WHY THE SPREAD IN RICHMOND COULD …

Note: The above is not to make a case for renting being financially superior to ownership in every respect. Clearly, ownership delivers principal reduction, potential asset appreciation, tax advantages, payment stability and personal control of shelter. In contrast, renters enjoy flexibility, avoidance of major repair expenses and resale risks.

Where We May Go

Now, with no attempt at crystal ball gazing, let’s look at scenarios that may swing the pendulum to rents returning to be more expensive than ownership … questions and comments.

• When was the last time this occurred?
• What conditions would need to be present?
• When could this occur again?

The last clear period when buying an entry-level Richmond home was generally cheaper monthly than renting was approximately 2019 through early 2022. The relationship reversed rapidly during 2022 as mortgage rates increased while home prices remained elevated. For Richmond specifically, I would describe 2019–2021 as the last defensible buying-cheaper window, with the crossover occurring around 2022. 

Referencing our Illustrative Richmond Starter-home Comparison matrix above, conditions must reverse the Ownership Premium of $700. That can happen through one powerful event or several smaller changes such as the five outlined above in the Shrink column.

1. Mortgage rates decline toward 5%–5.5%

A steep decline in mortgage rates help enormously, but not the only governing factor.

1. Home prices flatten/decline while rents grow

A combination like the following could produce a relatively quick crossover:

Home prices decline 5%–10%; Mortgage rates fall below 5%; Single-family rents rise 5% annually.

1. Single-family rental home supply contracts

Rental supply could shrink if landlords begin selling because of increased operating costs and regulations. Result: More homes for sale restrain prices; Fewer homes for rent accelerate rents.

1.  More entry-level homes are built

Household formation increasingly favors renting houses … especially for families that cannot qualify for ownership but desire the benefits of life in a single-family home. That can drive demand from apartments to SFH rentals.

1.  A weaker economy reduces housing demand 

A recession produces forced home sales that could lower ownership costs while forcing more households choosing or being forced to rent. 

My Timing Assessment

Under my most likely scenario, renting is not to become more expensive than buying again during the next three years. A crossover around 2030–2033 is possible, but it requires rents to outgrow home prices and some mortgage-rate relief.

My best estimate is that 2031–2034 is the most realistic window when an entry-level Richmond rental house could again cost more per month than ownership …but only if single-family rents consistently outgrow home prices and mortgage rates settle closer to 5%–5.5%.

So, my property management and investor decisions will be based on the above expectations … always with a diligent reexamination as the multiple “moving parts” develop.

Whether you’re managing one property or a growing portfolio, staying ahead of developing trends is critical. We’re here to help you evaluate your property performance, manage expenses, optimize returns … plus deliver proven successful property management.

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plus maximize your rental property return on investment.