Gimme shelter: the real cost of renting vs. homeownership
But I have never seen a discussion of the relationship between the relative cost of homeownership vs. renting, particularly as a function of the household budget.
That is a curious void. For the choice (or ability) to live in the residence one desires isn’t a matter of its cost by itself, but also the relative cost of the type of residence. What is the cost of a house compared with the cost of an apartment? How expensive are each of them compared with a household’s income? If both are too expensive, maybe the choice is made to live with mom and dad as an extended family.
The purpose of this post is to fill that void. Herein I compare the cost of home ownership — in terms of the down payment, but also in terms of the monthly mortgage payment — with the cost of renting, and further, compare each to the median household income (since by definition, the people renting the apartment or living in the house are a household!).
Let’s start with the “real” cost of a down payment on a house. The first choice of most people is to reside in a single family house. Most people who follow economics are familiar with the housing bubble, bust, and recovery in the past 15 years. Here’s what the median house price looks like measured in comparison with median household income:
In the above graph I’ve divided house prices by 10, to measure the share of annual household income needed for a 10% down payment. The graph would look exactly the same, just with different nominal values, assuming a different percentage of down payment.