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People looking to rent a place to live in San Jose, Calif., should be prepared to spend more than $3,100 a month.
And any who might think it would be cheaper just to buy a home there will likely be forced to think again. Typical homes in the Silicon Valley city fetch well more than $1 million.
In 45 out of 50 of the most populous U.S. cities, in fact, home costs have spiraled to such dizzying heights in recent years that it makes more sense for most people to rent rather than buy – despite rent costs that also have risen dramatically.
New Orleans is an exception.
According to Homebay, a provider of data-driven real estate intelligence, since 2016 the average home price across the country has increased by 70% more than the average cost of rent. That has resulted in the average new homeowner currently paying a monthly mortgage payment that’s $174 higher than the average paid for rent.
Some places are friendlier for first-time buyers looking to invest in a place to live. The South is the most affordable region, home to most of the metros with “price-to-rent ratios” favorable to buyers, including New Orleans, Oklahoma City, Memphis, Birmingham, and others.
According to Homebay, calculating a city’s price-to-rent ratio can help potential buyers to decide if their purchase would save them money. It can be determined by dividing the median home price by the median annual rent. A price-to-rent ratio of 15 or less means it’s better to buy. A price-to-rent ratio of 21 or more means it’s better to rent.
The current national average ratio is 18. In New Orleans, it currently stands at 12 – figured using a typical home value of $227,190 and a typical monthly rent cost of $1,594.
Rent prices were found to be within 20% of typical mortgage payments in 22 out of the 50 metro areas examined in the Homebay study. Other variables, such as home value fluctuations, interest rates, and additional costs of homeownership, also impact mortgage payments. Nationally, renters typically save $174 a month.
Many West Coast cities that have become popular among tech workers have price-to-rent ratios above 21. It’s cheaper to rent than to buy in San Francisco, Seattle, Denver, Salt Lake City, Los Angeles, Austin, and Portland.
“Technology companies brought high-paying jobs to cities like San Francisco and Seattle in the early 2000s, driving the average home price.” the Homebay report states. “Now, with many remote tech workers moving to lower-cost cities like Denver, Austin, and Salt Lake City, those metros are feeling sharp increases in home purchase prices.”
Three California cities – LA, San Francisco, and San Jose – have the largest differences between monthly mortgage rates and typical rent. In LA, people can save around $3,000 a month renting rather than buying.
Sadly, people saving money by renting with a goal of eventually buying will likely have to save for a while. The Homebay study found that, on average, it would take 166.3 months, or almost 14 years, for a typical renter to save enough money for a down payment. In more expensive markets like San Jose, buying a home would take nearly 38 years of rent.
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