Potential homebuyers in the U.S. have been facing a tough market with home affordability the worst it has been in over 30 years.^[1] Higher mortgage rates and still elevated home prices continue challenging for-sale affordability – keeping most renters in place. The number of renter households in America grew 1.9% year over year in the second quarter 2024 to a record 45.2 million.^[2] The Fed’s recent half-percentage-point cut took rates off a 23-year high, a move expected to jump-start a housing market hampered by prolonged borrowing costs above or near 7%.^[3] Mortgage rates had already begun to fall in anticipation of the Fed’s rate-cutting cycle. The steady decline in mortgage rates to two-year lows has resulted in a surge in refinance activity to the highest level since July 2022; however, buyer fatigue persists as purchase applications remained muted.^[4]

Though mortgage rates are expected to drop further, housing affordability in the U.S. is unlikely to improve significantly in the near term. Home prices have skyrocketed over 50% since 2019, due to the pandemic homebuying frenzy.^[5] The median existing-home price for all housing types in August was $416,700, up 3.1% from one year ago ($404,200).^[6]  To afford that price, prospective buyers need an annual income of at least $96,700 with a 20% down payment – 84% higher than the income required from before the pandemic. The typical U.S. household earns an estimated $80,610 annually, much lower than what they need to become a homeowner.^[7]

Since the pandemic, the nation’s housing market has been undergoing a major shift. A homebuyer with the current U.S. median income would have to spend 44% of earnings on monthly housing costs – the norm is around 30%.^[8]  Keep in mind that the monthly housing payment on an existing median-priced home has risen from around $1,870 in early 2022 (before the Fed started tightening) to about $2,700 in September 2024 – an increase of 45%, or around $840 per month.^[9]  By comparison, the average monthly apartment market rent has only risen by 8.5% during that same two and a half-year span, an increase of $140 per month.^[10] Although apartment rents have seen a significant increase since the pandemic, today’s renter would have to spend a much more affordable 26% of earnings on the average U.S. market rental rate.^[11]  Generally, households should spend no more than 30% of their gross income on rent.^[12]

Housing costs are high across the board, but renting continues to be a more affordable and realistic option for many Americans. The “buy premium” – the difference between the monthly cost of a new home purchase versus a new apartment lease – was 34% in August 2024 – a spread of $931 per month after a rapid increase that began in the summer of 2022.^[13] For perspective, the buy premium at the end of 2020 was at its long-term average of around 7% and a spread of just $113 per month.

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Buy Premium: For-Sale Housing Cost vs Rent Payment

The days of ultra-low interest rates are likely long gone. Some economists estimate that the average 30-year fixed mortgage rate will fall to 5.5% by the end of 2025.^[14] That’s still above the 3% mortgage rate level seen during the post-pandemic era, but substantially lower than the two-decade peak of 7.8% reached last fall.^[15]  Economists have also expressed concern that homebuying demand, reignited by lower rates, could drive home prices even higher if it brings out more competition among buyers.^[16]  Nonetheless, assuming home prices and rental rates don’t move higher from today, while mortgage rates do drop to 5.5% at the close of 2025, the buy premium would still be above 30% over renting with a cost spread over $800 per month.^[17] Therefore, renting will likely remain a far more attractive option, thanks to the significant difference between rent and cost to buy a home.