Redfin Report Highlights Increasing Differential in the Cost of Buying vs. Renting
The difference in the income required to buy a median home vs. rent an apartment is shown in Redfin's analysis. Our metro area has one of the higher but not one of the highest differentials.
The financial gap between purchasing a home and renting a home or apartment has grown significantly, making the dream of homeownership more distant, according to a report released by Redfin last Thursday.
According to the report, the typical American now needs to earn over $116,600 annually to afford a median-priced home in the U.S., compared to just $64,160 needed to afford an average apartment. That’s an 81.1 percent income gap — the widest it has been in recent years.
Those are national statistics, however. Here in the Denver metro area, the differential is much higher — 131.7 percent — according to Redfin. It takes an income of $155,717 to afford a median-priced home ($580,719) and $67,200 to afford a median-priced apartment ($1,680 per month). That’s a year-over-year income increase of 4% for buying and a 1.1% decrease for renting. That reflects the national pattern of increased differential between the affordability of buying versus the affordability of renting.
The income needed to afford the typical home is calculated using the prevailing median home sale price and average mortgage-interest rate over rolling three-month periods and assumes a 15% down payment. The typical housing payments noted in Redfin’s report include the mortgage principal, interest, property taxes, homeowners’ insurance and mortgage insurance.
The income needed to afford the typical apartment is calculated using the prevailing median asking rent over rolling three-month periods. Median asking rent figures cover newly listed units in apartment buildings with five or more units. Asking rents reflect the current costs of new leases during each time period. In other words, the amount shown as the median asking rent is not the median of what all renters are paying, but the median asking price of apartments that were available for new renters during the report period.
Redfin considers a home affordable if a buyer spends no more than 30% of their income on their housing payment. They use the same threshold for rental affordability.
The San Francisco Bay Area had the highest income differentials in the Redfin study. In San Jose, someone needs an annual income of $408,557 to afford the typical home for sale. That’s 218% more than they need to afford the typical apartment for rent—the biggest premium among the metro areas which Redfin analyzed. Next came San Francisco (176%), Seattle (145%), Austin (143%) and Los Angeles (141%).
Cincinnati saw the biggest drop in the homebuying premium. There someone needs an annual income of $80,752 to afford the typical home for sale. That’s 38.9% more than they need to afford the typical rental.