The conversation surrounding renting vs. homeownership has been contentious for some time now. The question as to whether it’s cheaper to rent or to buy a home is not clear cut, as several factors can impact both arguments.
One recent study—conducted by researchers from Zillow and the online marketplace platform Thumbtack—examines the hidden costs of homeownership and found that in certain metros, homeowners are paying more for insurance than for property taxes, with premiums rising 54% in just the past five years.
The study, released on Oct. 22, states that the “typical U.S. homeowner pays $16,566 a year, about $1,380 a month, for maintenance, property taxes and insurance on top of a mortgage payment.”
“Many households focus so much on winning the home and underestimate what it costs to live in it,” Zillow Senior Economist Kara Ng said. “Long after they receive the keys, insurance, taxes and upkeep are recurring expenses to plan for. Since these homeownership costs vary so much by market, home shoppers should run the numbers and understand what they can truly afford before they make an offer.”
What’s it cost?
The slippage in home sales and increases in buyer back-outs may reflect changes in how affordable homeownership is.
Economists have noted the significance of falling home sales. The latest data from Redfin also found that cancellations have reached post-pandemic highs, with 14.5% of buyers dropping out of deals.
Although the average 30-year fixed-rate mortgage has dropped slightly, it still remains in the mid-7% range, possibly keeping prospective buyers out of the market in fear of unaffordable mortgage payments. But mortgage payments seem to be only half of their concerns.
On average, a U.S. homeowner pays about $2,266 a year for homeowners insurance, but there are notable differences based on location, with some premiums outweighing property taxes.
According to the Zillow report, insurance premiums have risen 54% in the past five years, with certain cities having even steeper increases. The metros with the biggest jumps in premiums are Dallas, Texas (75%), Tampa, Florida (71%), Denver, Colorado (70%) and Houston (69%).
While these cities have the highest increases percentage-wise, Miami, Florida homeowners pay the most for their insurance premiums, at nearly $5,000 a year—or up 62% in the past five years.
Nationwide, the report estimates that property taxes cost about $3,129 a year. While the estimated property taxes are higher than the average insurance costs nationally, some cities break the mold, and now top $3,000 in annual insurance. These cities include Miami, Dallas, Houston, Tampa, Orlando and Denver.
Despite the significant jump in insurance premiums, Zillow found that the largest hidden cost is maintenance. Researchers found that households typically spend about $11,171 a year on maintenance, or about two-thirds of their total hidden costs.
Some cities even surpass the $12,000 threshold for maintenance, specifically Seattle at $12,594 and Boston at $12,486.
Kendra Sinclair—Thumbtack’s home trends expert—notes the slowdown in cost growth for maintenance, and does believe it’s a good sign for homeowners.
“The slowdown in maintenance cost growth is welcome news for homeowners managing a lot of competing expenses,” she added. “Planning for regular upkeep throughout the year can help prevent bigger repair bills and protect your savings when something unexpected happens.”
Homeownership vs. rentals
In terms of highest hidden costs by city, it’s no surprise to see the usual coastal city suspects.
According to the report, total hidden costs are highest in:
- New York ($25,111)
- San Francisco ($24,383)
- Los Angeles ($22,915)
- Boston ($22,096)
- Seattle ($21,354)
Given the latest data and sentiment from economists, one question remains: Is it more affordable to own a home or to rent?
The answer is not quite clear cut. Generally, young adults are urged to pursue homeownership as the end-goal, as owning a property is both a symbol of financial stability and acts as an asset.
Yet, as outlined by Zillow, homeownership comes with several hidden costs that first-time buyers may not be aware of, and these costs may continue to rise.
An analysis by Bloomberg also found similar results to the Zillow report, and noted that “hail and winter weather are driving up (insurance) rates in the Midwest and Mountain West, led by Colorado, Utah and Minnesota.”
Aside from insurance, maintenance and taxes, homeowners have to face elevated prices throughout every facet of the economy.
Increases in gasoline prices—which shot up by over 9% in the latest data from the Bureau of Labor Statistics (BLS)—have pushed inflation to 3.7%, or nearly double the Federal Reserve’s goal of 2%.
Expectations for the future fare no better than inflation and hidden costs. The latest Leading Economic Index (LEI) showed stagnant expectations, with researchers noting that many gains were offset by declines in consumer expectations and negative contributions from stock prices.
Inversely, rentals can provide a bit of breathing room. The September rental data by Realtor.com® reported that the U.S. median rent has fallen for its 38th consecutive year-over-year decline, and the median asking rent now sits at $1,694.
“Renters are getting a break, but rents are still significantly more expensive than before the pandemic,” Realtor.com Senior Economist Jiayi Xu said. “While asking rents are below their 2022 peak and concessions are still easy to find, for many households, relief is not the same as affordability. As the market enters its typical fall slowdown, we forecast that monthly rents will soften, but the additional relief might be more limited.”
While owning a home is the American dream, insurance premiums and maintenance costs can undermine those aspirations. Unless hidden costs are addressed, renting could become the better option, especially for price-sensitive buyers.
