Ask McEnearney: What are the real costs of renting?

This week’s Q&A column, sponsored and written by McEnearney Associates Realtors®, the leading real estate firm in Alexandria, is a bit of a departure from our usual format. To learn more about this article and relevant Alexandria market news, contact us at 703-549-9292. You may also submit your questions to McEnearney Associates via email for response in future columns.

Question: What are the real costs of renting?

Answer: Homeownership is not for everyone. Is that a bad thing and what does it cost in the long run?

There are times when homeownership makes sense, but is this one of those times? For many, the combination of inflation, high interest rates, and steadily increasing home prices has put homebuying plans on hold, especially for Millennials and Gen Z buyers who have less purchasing power due to lower incomes, more debt, and less equity.

In a pricey area like ours, the pinch is even worse. The D.C. area’s cost of living was reported this spring to be 53% higher than the national average, while the housing portion of overall costs was a whopping 144% higher. Combined with a growing population that hasn’t kept pace with housing inventory, the supply-and-demand pressure continues to keep rents high, although there are some signs the climb may be leveling. In August it was reported that the average monthly rent in D.C. was $1,901/month, Virginia was $1,594, and Maryland was $1,741.

About 40% of the D.C.-metro area is made up of renters and a growing number of them report spending more than half of their monthly income on rent. A November report from Virginia Association of Realtors showed that compared with homeowners, renters are carrying more than two times higher housing costs. Data from the Census Bureau indicates that as of 2022 about 50% of renters were housing cost burdened in Virginia, while only 20% of homeowners were housing cost burdened (meaning 30% or more of monthly income was going toward housing costs).

But even with the financial burdens that renting can bring, it may actually be better for some in the long run to stay in tenancy. Because while rental prices have climbed, so have purchase prices. High list prices coupled with high interest rates means it now costs 52% more to own a home than to rent.

The podcast The Daily from The New York Times covered this recently and reviewed the financial paths that buyers and renters take on the way to building wealth. On one path, renters hold off on buying and invest what would have been a down payment in another way; as the investment grows the renter can increase their buying power for a time when overall housing costs may be lower. On the other path, homeowners navigate the initial high costs of buying a home and are rewarded (eventually and hopefully) with equity that grows over years of ownership.

Here are a few things to consider when deciding which is the better path for you right now. Because the market can and will shift, and “timing the market” is almost…