First-Time Buyers Might Be Better Off Renting in These Pricey Markets

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In a previous report, we looked at ten of the most affordable housing markets for first-time buyers seeking a “starter home” in 2022. Today we examine the flip side, with a list of markets where would-be buyers might be better of renting a smaller house.

Downtown Austin skyline
Image: Austin, Texas skyline

According to a recent report, real estate markets like Austin, San Francisco, San Jose and Seattle currently favor renting over buying a starter home. At least when measured by the average monthly cost. And that’s no surprise, given the rapid rise of home prices these markets have experienced over the past few years.

Where Renting Beats Buying a Small Home in 2022

Are you thinking about buying a starter home in Austin, NYC, San Francisco or San Jose? On a tight budget? If you answered yes to both questions, you might be better off putting your purchase plans on hold for now and renting a place instead.

Those three real estate markets top the list of metro areas where renting is a better deal than buying a starter home, as of January 2022.

In February, Realtor.com published a report that showed the monthly cost of buying a starter home was cheaper than renting a similar-sized unit in 26 of the 50 largest metro areas in the U.S.

But in some real estate markets, the opposite is true. Rapidly rising home prices have made certain markets less affordable for buyers, shifting the needle in the other direction. Austin, Texas sits at the top of that list.

The table below was adapted from Realtor.com’s data. It shows the top-ten metro areas that favor renting a starter home versus buying one, as of January 2022. The column on the right shows how much more buyers pay per month when compared to renters, using median price data.

(In this context, “starter home” refers to studio, 1-bedroom, and 2-bedroom houses.)

MetroBuy Cost / MonthMedian Monthly Rent% Difference (Buy-vs-Rent)
Austin, Texas$3,115 $1,769 76.10%
New York, N.Y.$4,115 $2,700 52.40%
San Francisco, Calif.$4,436 $2,975 49.10%
San Jose, Calif.$4,541 $3,062 48.30%
Seattle, Wash.$2,908 $2,086 39.40%
Boston, Mass.$3,843 $2,795 37.50%
Denver, Colo.$2,540 $1,895 34.00%
Rochester, N.Y.$1,624 $1,264 28.50%
Portland, Ore.$2,176 $1,733 25.50%
Los Angeles, Calif.$3,742 $2,982 25.50%

What These Housing Markets Have in Common

Real estate conditions can vary from one city or metro area to the next, sometimes significantly. Even so, the ten housing markets shown above all share something in common. Steady home-price gains.

House values have risen steadily over the past couple of years, in all ten of these real estate markets. Eight out of the ten posted double-digit gains in the past year alone. The Austin, Texas housing market led the charge with a 40% annual increase in its median home value, according to Zillow.

Renting, on the other hand, is usually more affordable in these competitive (and often pricey) real estate markets.

House prices have risen faster than rents in most, if not all, of these metro areas. First-time buyers planning to purchase a starter home in one of these markets will likely end up paying more than someone who rents a similar-sized property.

But for a lot of people, the benefits of homeownership outweigh the higher price tag that can come with it. This is evident when you look at the number of homes being sold in these metros. There’s certainly no shortage of demand in housing markets like Austin, Denver, San Jose and Seattle.

Higher Mortgage Rates Another Factor

As if steadily rising prices weren’t enough to challenge starter-home buyers, we’ve also seen a sharp uptick in mortgage rates since the end of last year. This will have less impact than rising house values, in the grand scheme of things. But it certainly plays a role in the renting-versus-buying decision.

The chart below shows the average rate for a 30-year fixed mortgage loan over the past year, according to Freddie Mac. As you can see, that average rose from the 3% range last March to nearly 4% by the end of February 2022.

Mortgage rates early March

The bottom line here is that home-buying costs in the U.S. continue to climb, and that could affect many first-time buyers planning to purchase in 2022. This is especially true in real estate markets like Austin, San Jose and Seattle, where the cost of buying a typical starter home far exceeds the cost of renting one.