How Many Americans Are Renting VS. Buying?

Nearly 3 in 4 renters say they want to own a home, yet less than half can afford to buy a home in their area. This narrative of low affordability is not new, but it echoes louder than ever following the pandemic, where we saw sky-high housing prices. The good news is that a likely 2023 correction is expected to bring costs down by as much as 20% to 30%. The bad news is that mortgage rates continue to climb, causing an affordability paradox.

With house prices and the market in mind, it’s worth asking: How will the rental market be impacted? Will we continue to see more renters vs. owners even if rental prices go up while purchase prices go down? Let’s look at the numbers and find out. 

Renters vs. Owners by the Numbers

Long before the pandemic started, the United States had been experiencing a decline in home ownership. Currently, 36% of American households rent their homes, and 65% of those renters are young adults. Meanwhile, among those aged 65 and older, nearly 80% own a home.

Looking more closely at the demographics of renters vs. owners, we see millennials make up the largest portion of the home-buying population; they represent roughly 43% of homeowners this year versus 37% in 2021. Moreover, over half of all millennials in the U.S. already own a home, making them the fastest-growing demographic in the housing market.

While the average age at which Americans become homeowners has continuously increased in recent decades — primarily due to affordability — that’s not the whole picture. The cost of renting a home has also risen, especially during the pandemic. Over the past 50 years, rental rates have increased by an astonishing 61% — are they set to increase again next year? 

Are Rental Rates Expected To Go Up?

Experts predict that year-over-year rental prices will increase in 2023, putting renters in a tough spot as unemployment rates and the cost of living also rise. A forecast from the Federal Reserve Bank of Dallas predicts that rent could increase by as much as 8.4%, and other industry reports support this claim, averaging between 5% and 7%. However, this doesn’t mean renters will find a way to buy, especially with mortgage rates remaining elevated throughout the new year.

Even once home sale prices undergo correction, potentially by as much as 30% in 2023, inflated mortgage rates will contribute to the affordability problem. These rates will reduce buyers’ borrowing power and likely keep them out of the housing market for at least another year. Of course, the demand for rentals will go up with so many hopeful buyers already pushed out of the market. This demand will feed into the equation.

Renting Remains the More Affordable Option

Side-by-side comparisons of monthly mortgage and rental payments can paint a misleading picture. The average difference between the two is a mere $200 or so, making a mortgage payment slightly more expensive monthly. However, these comparisons need to factor in the additional money invested when taking out a mortgage.

Closing costs and other home-buying expenses aside, a typical mortgage requires a down payment of 10% to 20%, representing savings most renters don’t have. In addition, the average household wealth for homeowners in the United States is roughly $98,500 (excluding home equity), while renters have just $6,270 of the same. Even if all that money represented liquid funds that could be invested into a mortgage, more is needed to cover the $34,800 down payment on a $348k loan — the average cost to purchase a home in 2022. 

In addition to the upfront cost of buying a home, long-term affordability remains a significant factor contributing to a growing rental population. For example, homeowner’s insurance shows an average annual price of $1,200 in the United States compared to about $180 for renters insurance. Unfortunately, the affordability equation will be further stacked against renters in 2023 due to several factors, such as:

• New construction is down overall, and the number of new construction homes under $300k sits at 9% in 2022 compared to 42% in 2019.
• Housing prices remain elevated and may only be corrected in late 2023 or 2024.
• Mortgage rates may rise again. They will remain sustained throughout 2022, potentially not reaching a “reasonable” range of roughly 4.5% until 2024.

For all these reasons, it’s anticipated that the number of people renting in the United States will grow in 2023. Likewise, the demand for rental properties will grow along with it, contributing to the increasing rental prices discussed above. So, what does that information mean to those who own property or are looking to invest in it?

Accommodating the Affordable Housing Gap

The United States has faced a housing shortage for some time now. With new home construction expected to fall to its lowest rate in over a decade, the housing gap will widen further. Investors considering entering the market may see this as an opportunity to buy and rent out a property. Still, increased home prices can make for a risky deal, even for those leveraging cash.

Investors and property owners should find ways to create affordable housing using already-owned spaces to take advantage of the increased demand for rentals. The trends are already showing up: 

• The number of Accessory Dwelling Units (ADUs) is rising. It is expected to continue well into 2023, with people adding granny flats and small apartments to their properties to accommodate short-term and long-term renters.
• Finished basements and projects that separate a part of the home to create an apartment/rental space are growing in popularity. These projects provide an affordable way for homeowners to leverage their space without complex permitting for additional structures.
• Investors can still get into the market by looking at listings outside the MLS. Examples might include pre-foreclosures and properties from sellers who bought at the height or end of the pandemic and now want to exit.

Even considering all these things with renters vs. owners, there are still ways to get into the housing market in 2023 and find a positive outcome. It just takes the right information and a powerful tool to help you find good opportunities. 

About ProspectNow

ProspectNow is the first predictive modeling and marketing platform that provides real estate sales, brokerage, and lending professionals with robust systems and tools for extracting value from data through machine learning. 

Brokers and investors interested in buying on- or off-market properties will find ProspectNow invaluable. Contact us to learn more about how our platform can help you locate the ideal property.