Monthly Cost of Buying a House vs Renting
Since the year 2000, the cost of both renting and buying a home in the US has increased. But they haven’t done so at the same rate.
This fascinating time-lapse graph shows how both monthly mortgage payments and rents have moved over the past quarter of a century – but there’s one huge difference that jumps out at you immediately:
Can you spot it?
While mortgage amounts have fluctuated dramatically based on economic factors like the Dotcom bubble burst, the 2007-8 financial crisis, and the COVID-19 pandemic, rents have carried on increasingly in a pretty linear fashion.
So today, we’d like to unpack some of the reasons behind that and take a look at how our home city, Detroit, has performed during that time.
National Trends: Mortgage Payments vs. Rent Prices
Let’s start by taking a look at why this graph looks so different for home ownership vs. renting at the national level.
The Rollercoaster Ride of Mortgages:
The average monthly mortgage payment in the US in 2024 is $2,883, nearly triple what it was in 2000 ($1,030).
In some years, payments increased as little as 1-2%, while others saw overnight surges. For example, in 2022, mortgage rates increased by 46% across the country.
But there’s some method to this madness:
Economic Factors: Mortgage payments are heavily influenced by interest rates, which fluctuate based on broader economic conditions. For instance, the Federal Reserve adjusts interest rates to control inflation, affecting the cost of borrowing.
Housing Market Crashes: The 2007-8 financial crisis led to a sharp drop in home prices, and consequently, lower mortgage payments for new buyers. Conversely, the recent spike in home prices during the post-Covid boom has led to higher mortgage costs.
Government Policies: Programs like quantitative easing or changing tax incentives for homeownership can also impact mortgage rates.
The Steady Climb of Rents:
Rents were just below $850 on average in 2000. Fast-forward to 2024, and they’re more than double that – $2,150, according to Zillow’s latest data.
But they’ve increased at a fairly consistent rate, averaging 3.4% most years.
Here’s why:
Supply and Demand: The demand for rental properties has steadily increased, driven by factors such as population growth, urbanization, and changing lifestyle preferences.
Limited Supply: In many urban areas, the supply of rental housing has not kept pace with demand, driving up rents consistently.
Economic Security: Unlike fluctuating mortgage rates, rents are generally more stable because they are often locked in for longer periods (e.g., annual leases), providing landlords with predictable income streams.
The Detroit Story Since 2005
Detroit, like many other cities, has experienced unique shifts in both rental and homeownership costs since 2005.
Here’s a closer look:
Mortgage Trends in Detroit:
In 2000, the average monthly mortgage payment in Metro Detroit was just $637 – significantly below the national average. Today, it’s $1,577 – still putting it as the most affordable place to own a home out of the top 15 metro areas in America.
However, mortgage rates have fluctuated here just like in the rest of the country, mainly because of:
Post-Pandemic Boom: Following the initial shock of the Covid-19 pandemic, Detroit saw a resurgence in the housing market. Low interest rates spurred a buying frenzy, pushing home prices—and consequently, mortgage payments—upwards.
Interest Rate Hikes: Recently, as the Federal Reserve has raised interest rates to combat inflation, the average monthly mortgage payment in Detroit has seen significant increases. Buyers now face higher borrowing costs, making homeownership more expensive.
Rent Trends in Detroit:
As of July 2024, the average rent in Detroit is $1,212. Back in 2000, it was just $540 – meaning rents have increased by 124% overall.
This growth was fairly consistent between 2005 and 2019, as you can see from this chart:
During this time, rents only increased by 7.5%. But since 2019, the rental market has been heating up in Detroit, even as prices cool in other major US cities.
In the past 5 years alone, rents have increased here by 24%, and they’re still on the rise.
Here are some of the factors contributing to this fast-paced growth:
Consistent Increase: Unlike the fluctuating mortgage market, rent prices in Detroit have followed a more predictable upward trajectory until recent years. Despite economic uncertainties, the demand for rental properties has remained strong, increasing more post-pandemic.
Urban Revitalization: Ongoing efforts to revitalize downtown Detroit and nearby neighborhoods have also contributed to rising rents. As the city becomes more appealing, more people are looking to rent, driving prices up.
Supply Constraints: While there have been new developments, the supply has struggled to keep up with demand, particularly for affordable housing options, further contributing to the steady rise in rents.
Conclusion: Buying vs Renting in Detroit
In Detroit, while the cost of homeownership has seen dramatic shifts due to interest rate changes and market conditions, rent prices have steadily climbed, reflecting a consistent demand for housing.
So, what does this mean for landlords?
While prices are on the rise, there are still opportunities to buy affordable rental investment properties in the Motor City. And, even with interest rates rising, rents are still competitive enough to yield strong cash flow on financed properties, if you know where to look for the right investments.
Want more in-depth advice and data on investing in Metro Detroit? Contact us for a free introduction to the area.