It is well known that buying a home, especially in California, is now unaffordable for many.
This is true even for those who seemingly have done everything right and finished school, worked hard and saved diligently.
In fact, in 2023, only 15% of California households could afford to buy a home, according to the California Association of Realtors. This represents the lowest home affordability rate since 2007.
Of course, this is sad because, for many generations, homeownership has been a deeply rooted part of the American dream. We associate it with being stable, mature and successful. There is also real pride and freedom in ownership. Unlike a rental, you can make it your own and decorate and landscape it to your style.
For the most part, you have the freedom to do and say what you want in your house just as long as you pay the bills. Anyone who has rented and experienced a nosy or unreasonable landlord appreciates the difference.
Even the tax code historically encouraged homeownership by allowing for the deduction of interest on home loans and property taxes. These tax breaks, plus the pressure to keep interest rates and property taxes low, made ownership often cheaper than renting. The amount of wealth homeowners created when their property values went up over time made owning a home part of a solid financial plan.
But in today’s market, the numbers don’t always add up. For many, buying a home isn’t just difficult; it might not make sense, at least not right now.
Reasons to rent
The best time to buy or rent should never be determined by social pressure but, instead, by what works for you, what you can afford, and what is going on in the market. That means making housing choices that support your financial well-being and lifestyle and recognizing where we are in the market cycle.
For instance, there are times when renting is a wise choice regardless of the market:
—You are not sure yet where you want to live long term, and you are still exploring neighborhoods, cities, or even lifestyles.
—You travel often for work, are not home very much, and don’t want any surprise expenses or weekend projects.
—You are retired or physically limited and don’t want the hassle of maintenance.
—You are mobile or enjoy the freedom to make quick life changes, and you don’t want to worry about things like resale value.
—Renting is just a pause while you are going through a divorce, sending the kids to school, starting a business, or scoping out a new city.
Is now a good time to buy?
Even if you feel that you are ready to buy, it is generally more expensive right now to buy than to rent in most markets. This is where the concept of an economic cycle comes in. A complete real estate cycle, including periods of recovery, expansion, oversupply, and recession, generally lasts 10-18 years, and the last downturn was 16 years ago.
While the national housing market is not yet in an oversupply phase, certain regions are beginning to exhibit signs of elevated inventory and softening demand. It’s essential to consider your local market conditions when planning to buy a home. Remember the saying to buy low and sell high? If there is going to be a correction in the market soon, it might be a good time to wait and just rent.
Rent vs. buy comparison
Here is an example to illustrate the cost difference between renting and buying right now when the market is high. I am not a realtor, so we are going to use nice round numbers to simplify things.
Let’s use the median home price in Southern California, which is about $850,000. If you were able to obtain an FHA loan, you would only need to put 3.5% down, or about $30,000, and you would have a loan of $820,000.
I’ll note that FHA loan limits vary by location.
If the interest rate is 6.5%, your payment, including the mortgage insurance premium, would be about $5,770 a month. Add to that average monthly property taxes, insurance, and maintenance, and the total cost is about $7,220 a month.
Now, let’s compare that with the cost of renting.
A median three-bedroom two-bath home in Orange County, depending on the area, ranges from $4,000-$6,500 a month, so the savings of renting over buying would be $720-$3,220 per month.
Now, let’s look at how the numbers to buy a home change if there is a market correction of 20%. (The 2008 correction was about 27%.) The price of the home goes down to $680,000. The monthly cost of ownership goes down to $5,880, a difference of $1,340 a month.
Now, it might not happen, but what if interest rates dropped to 4%? (In early 2021, the average 30-year fixed FHA rate fell to approximately 2.65%.) How will that change the affordability?
The monthly homeownership cost for a $680,000 home at a 4% interest rate would be about $4,860. That is $1,020 less from the high-interest/lower-priced home and $2,360 less than if you bought the house at today’s median price and FHA rate. That is a cash flow savings of roughly $12-28k per year, year after year, if you can buy at a lower cost and a lower interest rate.
Plus, if you buy at a lower price, your property may appreciate and be worth more when you eventually sell.
Rent like you are buying
If this exercise has illustrated that now might not be the right time to buy, please do not look at it as if you are “just” renting.
Look at your next rental like it is a purchase. Choose your place carefully. Tour it like you’re buying and check for safety, noise, and how well the property is managed. If the property is in disrepair, do not believe the landlord if they claim they will fix issues later.
Do not obsess about the security deposit, consider it an additional expense since most do not get it back without a fight.
Find a place that is move-in ready. Interview the landlord just as they are interviewing you. Know their rules, pet peeves, and how much they intend to be involved in your life. Even if you are renting, it is still your home, and you deserve privacy and space.
And don’t forget to learn how rent control and landlord-tenant laws work in your area. I really like the Nolo book on tenant rights. Also, your local Fair Housing Council is an excellent resource for information on renting and first-time home buying.
Use the savings from the smart deal you found and negotiated on your rental to pay down debt, build an emergency fund, and position yourself to take advantage of the next market correction.
Now you know what you need to do. Your priorities are to choose a safe, comfortable, and well-maintained home, even if you don’t own the property, and bank as much as you can for the next correction if buying a home is your ultimate goal.
Michelle C. Herting is a CPA, accredited in business valuations, and an accredited estate planner specializing in succession planning and estate, gift, and trust taxes.
Originally Published: April 20, 2025 at 5:10 AM PDT