February 2025
“Owning a home is a hedge against rising rents.” Warren Buffett
For decades, the American Dream has centered on home ownership as a fundamental pillar of financial security. Conventional wisdom has long held that renting is simply a stepping stone to owning, with homeownership viewed as the wiser long-term financial decision. But soaring mortgage rates, insurance premiums, property taxes, and maintenance costs are giving first-time home buyers pause, and a valid reason to question the whether home ownership is still attainable.
The post-pandemic housing market has been a rollercoaster. In 2021, buyers locked in historically low mortgage rates below 3%, fueling a surge in home prices. Fast forward to today, and mortgage rates hover around 7%, making the cost of borrowing dramatically higher. A home that once carried a $2,000 monthly mortgage payment at a 3% rate now costs $3,000 or more to finance at current rates.
At the same time, homeowners’ insurance costs have skyrocketed due to hurricanes, wildfire risks, supply chain disruptions, and inflation-driven repair costs. States like Florida, California, and Texas have seen double-digit increases in premiums, further adding to the cost of ownership. Property taxes, particularly in high-demand markets, have also climbed as home valuations surged over the past few years.
For potential buyers, affordability is a serious hurdle. Many who once saw homeownership as the next step are now questioning if it’s even feasible. But renting isn’t exactly a bargain either. Over the past three years, rents have surged due to inflation, supply constraints, and a shortage of affordable housing. The median rent in many metro areas is now at record highs, making rental affordability a major issue.
However, unlike homeownership, renters avoid the burden of property taxes, homeowners’ insurance, and major repairs. While landlords often pass along some costs in the form of rent hikes, renters remain insulated from large, unpredictable expenses like a new roof or HVAC replacement.
Still, there’s a crucial distinction: Renting pays for shelter; homeownership builds equity. The real question is whether the long-term financial benefits of ownership still outweigh its rising costs.
Consider a $500,000 home with a 20% down payment ($100,000). With a 7% mortgage rate, the monthly payment (including property taxes and insurance) is roughly $3,500–$4,000. Compare that to renting a comparable property for $2,500–$3,000 per month. On paper, renting looks like the better short-term deal, especially when factoring in maintenance costs and surprise expenses.
However, long-term wealth accumulation tells a different story. Additionally, homeowners benefit from tax advantages, such as the mortgage interest deduction. For example, the annual interest on a $400,000 mortgage at 7% interest rate would be approximately $28,000. For a homeowner in the 25% tax bracket, this could translate to a tax savings of about $7,000 per year, effectively reducing a monthly mortgage payment by nearly $600. This can result in significant savings, further offsetting the higher upfront costs of homeownership.
Beyond tax savings, homeownership builds equity. Even at a modest 3% annual appreciation, a $500,000 home could be worth over $675,000 in 10 years, significantly boosting the homeowner’s net worth. Renters, unless they invest aggressively elsewhere, miss out on this powerful wealth-building advantage.
Who Should Rent, and Who Should Buy?
Renting Makes Sense If:
- You anticipate moving within 3-5 years.
- You don’t have sufficient savings for a down payment and closing costs.
- You prefer flexibility and don’t want to deal with maintenance.
- You’d rather invest in assets other than real estate.
Buying Makes Sense If:
- You plan to stay in one location for at least 5-7 years.
- You want to build long-term wealth through home equity.
- You can comfortably afford not just the mortgage, but taxes, insurance, and upkeep.
- You are financially prepared for potential housing market downturns.
The rent vs. buy decision is more complicated than ever in today’s high-rate, high-cost environment. While homeownership remains a proven wealth-building strategy, short-term affordability concerns make it a tougher leap than in past decades. Buyers need to be strategic, ensuring they have adequate savings and a financial cushion to weather unexpected costs.
Renting, on the other hand, provides flexibility and frees up cash flow that can be invested elsewhere. With both rents and homeownership costs climbing, making the right decision requires a close analysis of financial goals, market conditions, and personal circumstances.
At the end of the day, neither renting nor buying is a once-size-fits-all answer. The right, best choice is one that aligns with your timeline, finances, and long-term objectives. What worked for previous generations doesn’t necessarily apply today—but with careful planning, you can make the right move at the right time.
Mark Lazar, MBA
CERTIFIED FINANCIAL PLANNER™
