Though homeownership is the main way to build wealth in the US, the rise in interest rates and elevated home prices in recent years have made it more challenging to own a home. But does that mean that owning a home is less valuable than renting?

Many experts answer this question by comparing the average or median home price with the average or median rent price. Recently, these measures show homeownership is costlier than renting in many markets.

But in our new analysis, we show that properly comparing the value of owning versus renting requires accounting for differences in home characteristics, quality, and location. When we did this, we found owner-occupied housing is more valuable than previous methods have concluded.

As policymakers seek to help more people surmount barriers to homeownership, our analysis offers a method to more accurately compare the value—not just the cost—of owning versus renting a home.

How we define and measure value

A home’s true value reflects the characteristics of both the property and its surrounding neighborhood. Because rental and owner-occupied units typically have different property and neighborhood characteristics, median home values and median rent prices are not directly comparable.

To analyze the true value of renting versus owning, we adjusted for these differences. We could control only for variables captured in our underlying data, including the number of rooms, property size and age, the metropolitan area where the property is located, and residents’ sentiments on neighborhood crime and schools. There may be other differences in neighborhood amenities not captured in the data, meaning our estimates may understate how much more valuable homeownership is than renting.

How owner-occupied and rental housing differ

Calculating the true value of renting versus owning a home requires first understanding how typical housing features of the two tenure types differ.

Our analysis of 2021 American Housing Survey (AHS) data revealed that almost 90 percent of homeowners live in single-family housing, compared with about 33 percent of renters. More than 80 percent of owner-occupied homes had three or more bedrooms, compared with 30 percent of renter-occupied homes. About 84 percent of owner-occupied homes had more than one bathroom, compared with just 41 percent of renters’ homes.

Beyond the differences in physical characteristics, renters were more likely to disagree that their neighborhoods had good schools and were substantially more likely to characterize their neighborhoods as having high crime rates.

Owner-Occupied Housing’s Property and Neighborhood Characteristics Make It More Valuable Than Rental Housing

Source: 2021 American Housing Survey.

Given the variation between the two housing types, the next step in estimating their respective values requires breaking down the home’s value into the value of its parts.

How does adjusting for property and neighborhood characteristics affect value?

Characteristics like the number of bathrooms, the quality of building materials, and lot size each add value to a home. We approximate these values using hedonic regression.

Using AHS data, we start with a baseline that includes only a unit’s structure type, year built, and number of bedrooms. In this baseline, we find that owner-occupied homes are, on average, about 10 percent more valuable than renter-occupied homes, when looking at units of both types with the features we controlled for.

But when we consider additional variables, the difference in value increases. By adding variables to our baseline, we better characterize the differences between owner-occupied and rental housing and can more clearly separate the estimated values of each housing type.

The difference between the value of owner-occupied and rental homes increases to 33 percent when we add number of bathrooms, square footage, and metropolitan area to the baseline. When we add interior and exterior conditions, garage, and solar panels, owner-occupied homes are about 37 percent more valuable than rental homes. That difference remains at 37 percent when we further account for residents’ opinions of neighborhood schools and crime rates.

We suspect these are still lower-bound estimates because we have not considered other characteristics, such as the quality of building materials used, that would likely make owner-occupied homes even more valuable than rental homes.

Owner-Occupied Housing Is More Valuable Than Rental Housing, after Adjusting for Differences 

Ratio of the value of rental housing to the value of owner-occupied housing

Source: 2021 American Housing Survey.
Notes: CBSA (core-based statistical area) refers to metropolitan area. Property conditions include exterior and interior conditions, and neighborhood conditions include residents’ opinions of neighborhood schools and crime rates. Values adjust for differences in property and neighborhood characteristics between the two housing types. We validate the baseline model, which uses American Housing Survey (AHS) data, by comparing it with results generated from American Community Survey (ACS) data. Compared with the ACS, comparable owner-occupied homes in the baseline model are 4 percent more valuable. This is likely because of differences between the two surveys, including that the share of renters in zero-bedroom apartments is lower in the AHS and that homes in the AHS tend to be older.
 

Accurately comparing the value of owning versus renting requires new methods

Though buying a home has become more unaffordable, it doesn’t mean renting has become more valuable. Our analysis shows homeownership is still often more cost efficient for consumers because owner-occupied housing is typically larger and in better condition. Homeownership may even be more valuable than we’ve shown, given that our analysis doesn’t include the benefits from appreciation and equity buildup and the value of a relatively fixed monthly payment.

But unfortunately homeownership is not an option for everyone.

These findings underscore the importance of policies that break down systemic barriers to homeownership and address the current housing crisis. They also point to the need for additional new methods for measuring the value of homeownership versus renting, so renters are as informed as possible about homeownership’s costs and benefits.