Buying Can Still Beat Renting — Even With Mortgage Rates Above 7%

Mortgage rates above 7% have many would-be buyers frozen in place. The assumption is simple and intuitive: when borrowing costs this much, renting must be the smarter move. But a look back at the mid-1990s, when rates ranged from roughly 7% to 9%, tells a more interesting story. Many households who bought during those years ultimately came out ahead financially.

The Price-to-Rent Ratio: The Number That Matters Most

When the analysis looked at that period, a clear pattern emerged: homes that were inexpensive relative to their rents almost always favored buying, while homes expensive relative to their rents often favored renting and investing the difference. The comparison looked at two otherwise identical households, one buying with a 20% down payment and a 30-year mortgage, the other renting and investing everything not spent on housing, accounting for taxes, insurance, maintenance, transaction costs, the mortgage-interest deduction, refinancing, and taxes on investment returns.

The key metric is the price-to-rent ratio: a home's price divided by a year's rent. A $300,000 home renting for $2,500 a month sells for about 10 times its annual rent. Today that ratio is roughly 9x for the lowest-priced fifth of the market, about 13x in the middle, and significantly higher for the most expensive homes. Historically, homes at multiples like those almost always favored buying, even when rates matched today's.

Why Lower-Priced Homes Have the Advantage

One reason comes down to how rents behave as you move up the market. The priciest fifth of homes rents for about 5.7% of its price each year, compared with 10.8% for the least expensive fifth. Rents don't rise as quickly as prices do at the top of the market, so buying has historically looked most attractive at the lower multiples and least attractive at the higher ones.

A Simple Test You Can Run Yourself

You can check any home the same way: look up its price, find what similar homes nearby rent for, and divide the price by a year's rent. Based on the mid-1990s benchmarks, here's how the numbers tend to shake out:

That helps explain why the case for buying looks strongest in the lower and middle segments of today's market, and much less clear-cut at the top end.

What This Means for Today's Buyers and Renters

For buyers, don't let mortgage rates alone make the decision. A 7% rate is expensive compared with the recent past, but history suggests buyers of lower- and middle-priced homes have often come out ahead over the long run, even with rates above 7%. One caution: those 1990s buyers also benefited from refinancing as rates fell in the following decades, and today's buyers shouldn't count on that.

For renters, the story is more nuanced. Renting may stay financially attractive for higher-priced homes, especially for households that consistently invest their savings and expect to move again within a few years.

The Bottom Line

Mortgage rates alone don't determine whether buying makes sense. Even with rates above 7%, the financial case for ownership can be surprisingly strong, especially in the lower and middle portions of the market. What matters most isn't just the cost of borrowing, but how much home value you're getting for the price you pay.

Article adapted from an analysis by Brad Case for Homes.com. You can explore home values and local rent estimates on Homes.com.