November 15th 2024.
If you're currently weighing the options of renting versus buying a home, you may find that renting is the more favorable choice in many major cities, including Denver. A recent analysis by Bankrate on home affordability revealed that the monthly cost of buying a home is nearly 37% higher than that of renting. This holds true for the top 50 metro areas across the country, where the average monthly mortgage payment for a median-priced home is $2,703, while the typical rent is $1,979, resulting in a 36.6% difference.
In fact, a study conducted by Clever Real Estate found that Denver ranks as the ninth most affordable city for renters earning minimum wage. However, the study also highlights that in order to comfortably afford a one-bedroom apartment in Denver, the rent would need to be $951 or the minimum wage would need to be $34.40. This is in stark contrast to the current average rent of $1,789 and the minimum wage of $18.29 in Denver, which is significantly higher than the federal rate of $7.25 per hour.
According to the 30% rule, a single person in any of the cities included in Clever's study would need to earn at least $18 per hour to afford rent for a one-bedroom apartment. However, only three cities, including Denver, have minimum wages at that level. The others are Seattle at No. 15 and San Francisco at No. 26. Despite these challenges, homeownership remains a dream for many Americans, as highlighted by the Bankrate analysis which found that about 78% of Americans believe owning a home is part of the American Dream.
The main barriers to homeownership include lack of income, high home prices, and the inability to afford a down payment and closing costs. In Denver, the median price of a home in October was $599,975, which is a 4% increase from September's $575,000 and a 3% increase from October 2023's $581,000.
If you are struggling to decide between renting and buying a home, here are some key points to consider when weighing the financial pros and cons. Buying a home allows you to build equity over time and if you have a fixed-rate mortgage, your monthly payments will remain the same. Additionally, there are tax benefits to owning a home and the ability to make renovations and updates. On the other hand, upfront costs such as the down payment and closing costs can be high, property values may decrease, and it can take years to build equity. Homeowners are also responsible for annual property taxes, insurance, and potentially HOA fees.
Renting, on the other hand, has low upfront costs and no responsibility for maintenance or property taxes. Some rentals may also include utilities, and rental insurance tends to be lower than homeowners insurance. However, there is always the risk of rent increases, no opportunity to build equity, and limited choices in competitive markets. Renters also do not receive any tax benefits.
Buying a home also offers the opportunity to build wealth, as shown by an analysis from First American Financial Corp. The study, based on median home prices and rents, found that those who bought homes before the pandemic saw an annual increase of about $32,000 in their wealth over the last five years. In contrast, those who rented missed out on historic price appreciation. The study assumes that renters only spent their monthly rent payments, while potential homebuyers took out a 30-year, fixed-rate mortgage with a 5% down payment.
Mark Fleming, chief economist at First American, explains, "For someone who purchased a home in 2019, just before the pandemic hit and the housing market turned red hot, the wealth-generating benefit was approximately $158,000. A renter over that same time period cumulatively lost $89,000." Ultimately, the decision between renting and buying a home depends on personal circumstances and financial goals, but it is clear that homeownership offers a unique opportunity to build wealth and achieve the American Dream.
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