California homeownership priced out in the buy vs. rent question

As the cost to buy outpaces the cost to rent, more and more Californians are forgoing the benefits of homeownership in favor of saving money.

As California home prices have increased rapidly during 2020-2021, the monthly cost of paying a mortgage is far more costly than renting a comparable home. In 2022, rising interest rates were the final nail in the coffin, pushing homeownership out of reach.

While the cost of rents and mortgages have both increased, 2022’s buy-versus-rent gap has widened considerably, after being on more even-footed during 2021, according to John Burns Real Estate Consulting, a California-based real estate advising firm.

Nationally, the monthly price of having a mortgage compared to a lease has increased from a gap of just $25 in April 2021 to more than $800 as of April 2022. This April 2022 buy-versus-rent gap is the highest in over two decades.

Editor’s note—the consulting group assumes each mortgage payment is for a home priced at 80% of the median-priced home, purchased with a 5% down payment and an average 30-year fixed rate mortgage (FRM) rate. This includes maintenance costs ranging from 0.85% to 1.25%. The methodology for rent also assumes homes valued at 80% of median-priced existing rentals, along with collective data for rent in a specific area and includes renter’s insurance.

Here in California, buying is significantly more costly than renting. For example, nationally, the year-over-year cost to buy increased 37%, whereas the cost to rent only increased 6%. In Riverside, the cost to buy increased 41%, and the cost to rent went to 8%.

With the buy-versus-rent margin as wide as it is in 2022, homeownership has become impossible for most renters.

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The shift in demand for rent calls for more residential construction

California has long been a state of renters. With the second-lowest homeownership rate in the nation, California already experiences high demand for rentals. Now, as interest rates continue to rise, even more would-be homebuyers will be forced to remain renters.

The only solution to reverse course is more residential construction.

After two years of consistent decline, California residential construction starts turned positive in the second half of 2021. However, this small increase is a fraction of what is needed for construction to catch up to demand for housing of all types. In 2022, the chaos of rising interest rates, reduced access to credit and labor and building material shortages has created a perfect storm to hold back construction.

As California’s housing market faces down 2022’s undeclared recession, construction will be unable to pick up more steam until the next recovery — likely around 2027.

In the meantime, as more and more homebuyers take a step back from owning in favor of renting, home prices will fall back. California’s pace of home price increases has already slowed significantly as of May 2022. Expect prices to level and decline in the months ahead, finding a bottom around 2025.

Are your seller clients choosing to rent instead of buy again? Let us know your experience in the comments!

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