Is buying a home still worth it?

For years, real estate was considered a good investment. But is that still the case?

(NEXSTAR) — A recent report found that buying a home in the U.S. today is less affordable than any other time in the last 17 years, only emphasizing the pressure many homebuyers may have already been feeling. 

More than 35% of the average wage is currently going toward the typical costs of a home, the report from real estate data company ATTOM determined. Coupled with stubborn mortgage rates, hovering around 6.95%, the thought of owning a home may feel out of reach for many.

It all comes at a time when nearly 80% of Americans say owning a home is part of the “American Dream.” 

For years, real estate was considered a good investment. But is that still the case?

That will depend on what you’re looking for in a home. 

If, for example, you’re staying in a city for a short term — like a year or two — renting may be the better option. If you’re looking to stay somewhere for longer, you may opt to become a homeowner. 

“If you plan to stay in your home for more than five years, you will likely be better off financially owning your home compared to renting,” Daryl Fairweather, chief economist for Redfin, told Nexstar via email. 

Over the past five years, home prices have climbed 47%, Fairweather explains, “thanks in large part to the pandemic homebuying boom.” While we likely won’t see the same rate of appreciation in the coming years, he notes that “both home prices and rents will likely be higher in the future.”

Those costs will at least partially be driven by the housing shortage the U.S. is facing, Bankrate analyst Jeff Ostrowski explained earlier this year. A lack of supply “is likely to keep home values elevated,” he added.

That will also help appreciation build on your home and help you build equity, which can help with other investments.

It’s worth noting, though, that much of this will depend on where you live. In communities where home prices are dropping, for example, the value of your own home may decline. 

What’s better — renting or buying?

While buying a home has its upsides, like building equity and having a space to call your own, there are downsides. There’s a chance your home’s value will decrease instead of appreciating, your monthly costs may be unpredictable, and you have less flexibility if you’d like to move. 

If those aspects are important to you, you may feel more inclined to rent. Your monthly payments are more predictable, you can move when your lease is up, and, in most cases, you aren’t on the hook when it comes to maintenance problems. 

If you’re stuck between buying and renting, you may want to focus on the finances of it all, Chris Varsek, the lead real estate agent with The Varsek Team in Illinois, previously told Nexstar via email. Unless you’re flush with cash, buying a home also comes with the burden of a mortgage. Even if you’re renting, you’re still, in a way, paying a mortgage — except it’s the landlord’s mortgage, Varsek explains.

There are various online calculators that can help you determine whether it’s cheaper for you to rent or buy a home. Before diving into them, you may first want to consider what is financially best for you. 

Generally speaking, experts say you should spend no more than 30% of your gross income on housing, including rent or mortgage, home association fees and utilities. That’s in line with the U.S. Department of Housing and Urban Development’s definition of affordable housing.

Many online calculators, like one version from Realtor.com, automatically account for those extra costs based on the location you’re looking in. 

Take, for example, Memphis, Tennessee, where home prices have been dropping recently. The average home price is still about $227,000 while the average monthly rent is $1,275. After accounting for those extra costs, Realtor.com’s calculator determines buying a home will become cheaper than renting after seven years.

The calculator doesn’t calculate what you may make if you were to rent out your home — a move that could make real estate a better investment for you. Overall, experts have forecasted that rent will remain high but may be softening slightly. The housing market may improve this year compared to 2023, though it likely won’t be what we saw in 2020 and 2021 — and mortgage rates may not come down anytime soon.