Being a “forever renter” is an idea many millennials (myself included) have been grappling with in recent years. Buying a home, once considered a milestone on the adulting journey, feels more out of reach than ever for some of us. I know I’m not alone in this feeling, as there are plenty of would-be homebuyers to share in my woes. So, let’s take a look at some of the barriers to homeownership now and whether there is reason to believe circumstances may change in the future or if some of us will be tenants for eternity.
Barriers to Buying
High prices. Perhaps the most obvious hurdle to buying a house is the cost. Nationally, median home prices have gone up nearly 250 percent in my lifetime (I’m in my early 30s) and more than 25 percent since the start of 2020. This upswing is even more pronounced in the Greater Boston area that I call home, where the median single-family home price for July was $910,000! Granted, the statewide median price is closer to $640,000. While that number may be more within reach for some, location is a major contributor to quality of life. As such, many may opt to rent in a prime spot rather than buy in an area that is not as close to work, family, and friends.
Interest rates. With rates remaining elevated as the Fed continues its efforts to combat inflation, mortgage rates are also on the high end. The average rate on a 30-year fixed mortgage is 8 percent (according to Bankrate). That may not seem out of the norm to anyone who purchased a house prior to 2000. But it is well above the average of the decades since then, with mortgage sizes also dramatically larger.
Using the $910,000 median price for the Boston Metro area and applying a 7.5 percent rate on a 30-year fixed mortgage, the monthly payments would be around $5,100 after a 20 percent downpayment and before taxes and insurance. Compare that to one year earlier when the median price was around $840,000 and national mortgage rates were around 6 percent. At that time, the monthly payment would have been closer to $4,000. Not only are the absolute levels something to balk at, but the pace at which they’ve increased has many would-be homebuyers feeling left in the dust.
Relative value. Aside from the standalone price tag that comes with buying a home, another consideration is the relative value of renting versus owning. Looking outside of the Greater Boston area, renting seems to be a pretty good value proposition around most of the country. According to Redfin, there are only four major metro areas in the U.S. where it is cheaper to buy than rent. Outside of Detroit, Philadelphia, Cleveland, and Houston, the average home costs roughly 25 percent more per month to own versus rent.
The value of accumulating equity in a home is a key detail that isn’t captured in that comparison. Nonetheless, many potential buyers are still waiting for that ownership premium to shrink significantly before pulling the trigger on a home purchase. For now, a 25 percent rental “discount,” along with avoiding the headaches that come with homeownership, seems well worth it.
Reasons for Optimism?
Of course, the housing market is regional. States like Massachusetts and California are notoriously expensive to live in. Still, the story is relatively similar across the country if you’re comparing each region to itself at an earlier point in time. No matter how you slice it, homeownership is less attainable now than it has been in decades, and that won’t change until the underlying market conditions begin to shift. While the clouds hang heavy over the heads of many would-be buyers for now, there is reason for hope!
Eventually, interest rates will begin to normalize, and the lower rates will make mortgages more accessible. In turn, we’d expect to see more owners putting their homes on the market, and that increased inventory should encourage moderation in overall prices.
In the meantime, existing homeowners can continue to enjoy historically high levels of equity amid the stubbornly elevated home prices. As for me, I’ll be living the renter’s life but keeping a watchful eye on evolving conditions.