Renting Will Likely Be Less Expensive Than Buying a Home for Some Time

With average mortgage payments 38% higher than average apartment rents as of year-end 2023, many U.S. households are continuing to rent rather than buy a home. Even though the premium to buy a home may come down over the next several years based on home-price, interest-rate and rent-growth forecasts, it is expected to remain high enough to keep today’s renters renting for longer.

Figure 1: Average Monthly Multifamily Rent vs. New Home Mortgage Payment

Source: CBRE Research, CBRE Econometric Advisors, Freddie Mac, U.S. Census Bureau, Realtor.com®, FHFA, Oxford Economics, Q1 2024.
Note: Does not include estimates for homeowner's or renter's insurance. Assumed down payment of 10% with prevailing and forecast interest rates.

While some may question the relationship between renting and buying a home, CBRE’s detailed statistical analysis reveals that the relative price of buying and renting impacts the demand for each. When the relative cost of buying increases, as we’ve seen in recent years, the demand for rentals increases.

We saw this play out in 2023, when normally slower Q3 and Q4 demand exceeded that of Q2. Prior to the pandemic, Q2 has almost always been the strongest quarter for absorption.

We expect average multifamily rents to grow by 2.8% annually over the next five years, in line with pre-pandemic trends. Given this modest growth, it will take a combination of falling home prices and lower mortgage rates to bring the cost of home ownership closer to that of renting. With long-term mortgage rates expected to remain above their pre-pandemic levels, homeowners may find that the low financing they secured years ago will keep them in their current homes for longer. This in turn will continue to suppress for-sale activity, which will further boost home prices.

Figure 2: U.S. Housing Surplus/Shortage

Source: CBRE Research, CBRE Econometric Advisors, U.S. Census Bureau, Q1 2024.

An estimated U.S. housing shortage of 3.8 million units is also helping to support home prices and the cost-to-buy premium. Nearly 90% of this shortfall is in single-family homes and smaller multi-unit dwellings. While new construction activity and fewer household formations appear to have modestly eased the supply shortage, the most optimistic forecasts foresee the shortfall continuing until at least 2029. However, CBRE’s view is that a slowdown in new construction likely will extend the housing shortage beyond then.

Figure 3: Cost Multiplier of New Home Mortgage Payment vs Monthly Multifamily Rent

Source: CBRE Research, CBRE Econometric Advisors, Freddie Mac, U.S. Census Bureau, Realtor.com®, FHFA, Oxford Economics, Q1 2024.
Note: Does not include estimates for homeowner's or renter's insurance. Assumed down payment of 10% with prevailing and forecast interest rates.

All markets will see lower cost-to-buy premiums once interest rates drop and home price growth slows. In certain markets like Dallas, Raleigh and Chicago, the cost-to-buy premium likely will fall back in line with pre-pandemic averages within five years. Other markets like Los Angeles, Austin, the San Francisco Bay Area, Seattle and Nashville will take longer.'

Source: cbre‍