Affordability constraints have emerged as one of the biggest challenges to the continued housing recovery. However, according to one metric, it’ll be a long while before rent becomes the more sensible option.
Even if mortgage rates rise by a considerable amount, they are not likely to impact homebuying nationally to any significant degree. That’s the conclusion many have reached when looking at the so-called mortgage breakeven rate, which refers to the rate at which mortgages would need to be to make rent the more sensible option.
On a national level, the mortgage breakeven rate is generally believed to be around 8% or more. This means that, all things being equal, the cost of buying would be the same as the cost of renting when mortgage finance rates are 8%. Of course, the breakeven rate varies across regions and is said to be much lower – perhaps 5% to 6% – in places like New York and San Francisco.
While mortgage rates are widely expected to rise as policymakers roll back post-crisis stimulus programs, they remain less than half of the breakeven rate. The average commitment rate on a 30-year fixed-rate mortgage averaged 3.90% in the week ended August 10, according to Freddie Mac. The 15-year fixed rate was 3.18% and the 5-year adjustable rate was 3.14%.
Rates peaked in December, when the 30-year fixed rate climbed to 4.32%. They have been in general decline ever since, partly in response to monetary policy expectations.
Of course, the breakeven rate doesn’t tell the whole story. It doesn’t consider the myriad of other affordability challenges that have made homeownership less attractive than rent, especially for first-time buyers. Stagnant wages, surging home values and supply-side constraints have all made homeownership out of reach for many Americans.
When factoring in monthly costs, homeowners in all 50 states and D.C. shell out 33% to 93% more than renters, according to a NerdWallet analysis. This puts the median cost of owning 54% higher than rent. Although rent can’t compete with the long-term financial benefits of homeownership, it’s usually much cheaper on a month-to-month basis.
Still, there’s no denying that housing demand is on the rise. Unemployment is the lowest it has been in 16 years and job creation remains steady. As a result, home prices are up in 64 consecutive months when measured in year-over-year terms.
For now, the housing market appears to be on even keel as there are more positive factors boosting it than dragging it down. Based on the trajectory of home values, buying remains the logical choice for those who can afford it.
 Ellen Chang (July 15, 2017). “Housing Stocks Could Blow Over Soon for a Number of Reasons.” The Street.
 Emily Starbuck Crone and Dan Tonkovich (April 7, 2017). “Here’s how much more it costs to own vs. rent a home in every US state.” CNBC.
 National Association of Realtors (July 24, 2017). “Existing-Home Sales Retreat 1.8 Percent in June.”