Rent or Buy?

Last weekend I visited friends in New York City. The topic of residential real estate came up multiple times in our conversations. Few of my friends own apartments. Most rent and have lived in their apartments for over five years because it is simply too expensive to move. I am familiar with the idiosyncrasies of the New York housing market, having spent nearly a decade living there, but I was shocked to hear just how expensive rent currently is in the city.

New York City has always been an expensive place to call home. Median rents in Manhattan and Brooklyn rose to all-time highs this summer hitting $4,670 per month in Manhattan and $4,000 per month in Brooklyn. Despite the high prices, competition among would-be renters remains fierce leading to bidding wars, which drive rents ever higher. Even New Yorkers who have secured a rent-stabilized apartment will see increased costs this year following the passing of a guideline that permits landlords to increase one-year leases by 2.75%- and two-year leases by 5.25%.

Wage growth in New York City has not kept up with rent growth. Rents increased more than seven times faster than wages last year. This affordability crisis is not unique to New York. According to Zillow, rents have outpaced wages in 44 of the 50 largest U.S. metro areas since 2019. In Atlanta, wages increased by 12.2% from 2019-2023, but rent increased by a staggering 35.6%, which is above the national average of 30.4%.

Rents have risen throughout the country for several reasons. Many would-be home buyers have opted to rent due to high mortgage rates and limited inventory. This has led to increased competition for the available inventory with a significant proportion of renters able to afford higher rents. In some areas, the supply of rental homes has not kept pace with demand. Moreover, the supply available has included a surge in high-end, and higher-rent, apartment construction.

Change might be coming. The Federal Reserve’s 0.5% interest rate cut in September has led to mortgage rates dropping to their lowest level since February 2023. If policymakers follow through with their intentions to continue cutting rates, mortgage rates will fall further even though we are highly unlikely to see the low rates of 2020 and 2021. The balance might then shift towards renters becoming homebuyers. However, lower mortgage rates will likely bring in more competition for the limited supply of homes available, driving home prices higher. So, even lower mortgage rates might not address the affordability crisis faced by so many Americans. Hopefully, declining interest rates will encourage homebuilders to get projects off the ground and increase the housing supply.

Of course, there are many factors to consider when it comes to deciding whether to buy or rent, many of which are not financial. If there is an increase in the supply of available homes, Americans will hopefully have more options available to them to make the best decision for their families.

Meghan Pearson