Soaring mortgage rates discourage home buying even as rental costs jump

The monthly starter homeownership cost in Austin, Texas was 97.8% higher than the median rental price

Rents surged to a record high in June for the 16th consecutive month. Still, more than three-quarters of the 50 largest U.S. metros favored renting over buying a starter home last month, according to a new report.  

"The cost of starter homes actually went up so much that even though rents also increased, it became more affordable in a greater number of markets," Chief Economist Danielle Hale told FOX Business.

If not for higher mortgage rates, the rent versus first-time buying gap would have shrunk in the first half of this year, as rents grew more quickly than starter home prices.

- Chief Economist Danielle Hale

In June, the U.S. median rental price reached a record $1,876, up 14.1% compared to a year ago, according to recent data from All unit sizes, including studios, one-bedroom, and two-bedroom apartments, saw double-digit annual gains. 

Studios were up 15.1% compared to a year ago while one-bedrooms and two-bedrooms were up 13.8% and 13.6%, respectively, according to the data. 


At the same time, monthly starter homeownership costs nationwide were on average 29.9%, or $561, higher than rents in June. In January, starter homeownership costs were only up 4.4% over rents. 

It has become more expensive to finance a home, "tipping the housing affordability scale in favor of renting over first-time buying," according to the report. 


A ‘for rent’ sign posted in front of an apartment building on June 2, 2021 in San Francisco, California.  (Photo by Justin Sullivan/Getty Images / Getty Images)

Mortgage rates have become the "biggest driver of the widening year-over-year gap between first-time buying and renting." Last week, the benchmark rate stood at 5.51% according to mortgage buyer Freddie Mac. 

The average 30-year mortgage rate jumped more than two percentage points from January to June. In January, the rate as reported by Freddie Mac was 3.45%, according to data. In June, the average 30-year fixed mortgage rate rose to 5.52%. 


"In fact, our analysis shows that if not for higher mortgage rates, the rent versus first-time buying gap would have shrunk in the first half of this year, as rents grew more quickly than starter home prices," according to Hale. 

Instead, the affordability gap between renting and buying widened by more than $480 from January to June. 

Last month, 38 of the 50 largest U.S. metros offered lower rents than monthly starter ownership costs, up from 24 markets in January. 

Krystal Guerra, 32, poses for a picture outside her apartment in the Coral Way neighborhood of Miami.  ((AP Photo/Rebecca Blackwell) / AP Newsroom)

Only eleven metros favored first-time buying over renting in June.

The good news is that price growth is slowing, according to Hale. 


"Price growth for rentals and for homes for sale has slowed in recent months," Hale said. "This is not the same as saying that homes or rents are getting cheaper, but it does mean that the increases are shrinking which is a step in the right direction. For those with flexible moving timelines, we expect to see more slowing ahead."

Here are the top ten metros that favored renting:

  1. Austin, Texas: The monthly cost for starter homes in June was 97.8%, or $1,822, more than renting.
  2. San Francisco, California: 79.9% ($2,535)
  3. Seattle, Washington: 78.3% ($1,801)
  4. New York, New York: 70.0% ($2,092)
  5. San Jose, California: 65.4% ($2,175)
  6. Portland, Oregon: 61.6% ($1,128)
  7. Los Angeles, California: 60.5% ($1,846)
  8. Boston, Massachusetts: 57.3% ($1,698)
  9. Houston, Texas: 53.3% ($773)
  10. Phoenix, Arizona: 52.2% ($929)