As a financial advisor, I’ve long seen a stigma against renting. Many homeowners pooh-pooh the notion of “throwing money away” and “failing to build home equity.”

Indeed, renting can often feel like a waste; leasing an apartment can put hundreds of thousands of dollars in a landlord’s pocket over a decade while leaving the renter with nothing to show.

But it turns out that the math is far more complicated than homeowners often believe. The average cap rate of multifamily units in the U.S. averages around 5%, according to surveys by real estate firm CBRE. That’s well below the 8% rate seen by office and retail, and doesn’t cover the cost of capital for most investors. In other words, putting money in blue-chip stocks now has a higher expected return than in housing.

Renters also can have legitimate reasons to avoid purchasing. Perhaps their work requires flexibility that only renting can provide. Or their credit scores are too low to find a mortgage with reasonable terms. The U.S. financial system was never designed with equitable solutions in mind.

Now that mortgage rates are at 7%, there’s another reason for renters to avoid committing. Because for the first time in a generation, it financially makes more sense for the average American to rent instead of buy.

Is It Better to Rent or Buy? What the Math Says.

When homeowners buy a house, their potential return stems from three key areas:

• Price Appreciation. Rising home values will immediately increase homeowner equity. And favorable tax laws mean that the first $500,000 of appreciation is tax-free if you file jointly.
• Forced Savings. Mortgage payments often compel people to save and invest money they otherwise would have spent.
• Subsidized Leverage. Government-based guarantees decrease mortgage rates, allowing homeowners access to an implicit investment subsidy.

Homeowners will also benefit from tax write-offs from mortgage interest deductions, although these are not significant sources of return. Local real estate taxes almost always outweigh tax savings at the federal level.

But three key factors now negate these reasons to buy a house today.

Reason No. 1: High Mortgage Rates = High Interest Payments

In 2021, the average national mortgage rate sat at roughly 3%. Using the average $423,600 average home price reported by the U.S. Census Bureau, a first-time homebuyer putting 3.5% down would have seen a $2,142 monthly payment, assuming a 30-year mortgage, 1% property tax rate on the sale price and $66 per month in insurance. $701 of the first check goes into principal, while the remaining $1,441 pays down interest and other monthly costs.

At first glance, that seems terrible; long-dated mortgages mean only a fraction of mortgage payments go into building equity to start.

Nevertheless, it would have been a great time to buy. Better to “throw away” $1,441 per month in interest payments than spend $1,900 per month on the median U.S. rental.

Now consider today’s market in 2023. The average home price is now $436,800 and mortgage rates have jumped to 7%.

That same homebuyer math now brings our new monthly payment to $3,234, of which only $345 goes into principal. Interest payments and monthly costs now consume $2,889 per month. Compound interest rates can create significant distortions that require a financial calculator to see through.

Meanwhile, monthly rents have only risen to $1,937, according to data from Rent.com. For the average American, it’s become a no-brainer to “throw away” $1,937 per month on rent than see $2,889 disappear into interest payments, property taxes and other fees. Mortgage rates must fall to 4.2% for the math to break even.

Reason No. 2: Weak Appreciation

Home values are also expected to stagnate. According to surveys by Zillow, economists and housing experts believe home prices will rise only

3.5% per year through 2027, a rate that will fail to match inflation.

That’s important because mortgage leverage doesn’t come for free. And if your cost of capital exceeds your profits, you end up with a negative return.

In plain English: Investors cannot make money on a home appreciating at 3.5% if they borrowed at 7% to finance it.

Going back to our previous example, assume that our average $436,800 home increases at 3.5% per year, which comes to $501,238 by 2027. The gross profit is the difference between the two numbers, or $64,438. To achieve that return, an investor would have put in $3,234 payments for 48 months, or $155,232. And because of the 7% mortgage rate, only $19,057 would have gone into principal while the remainder went into interest and other monthly costs. (Again, a financial calculator is necessary to find these figures).

That means a homebuyer’s total equity in the house comes to $83,495… barely half of the $155,232 they put in!

Reason No. 3: Mortgage Rates Should Fall By 2025

Finally, the U.S. now faces a steeply inverted yield curve. 3-month treasuries yield 5.1%, while 2-year rates are at 3.9%

That suggests that mortgage rates will fall over the next several years as the U.S. Federal Reserve steps back from rate hikes.

Some would-be homebuyers would see this as an opportunity to buy now and refinance later. That would help lock in a purchase price while leaving the door open for lower monthly payments in the future.

But refinancing can cost anywhere from 2% to 6% of an outstanding mortgage balance. If mortgage rates drop back to the 3% range, the additional $8,200 to $24,700 refinancing costs will add between 0.2% and 0.5% to a future interest rate. Put another way, the midpoint suggests an additional 23% interest rate payment throughout the remaining loan.

Buying a House in 2023: Should You Rent or Buy?

Of course, buying a house depends on individual circumstances as well as finances. A family looking to settle down might pay more to stay in place; changing school districts or moving houses is a significant hassle. Certain regions can also have few available rentals on the market. Mining and drilling towns in the Midwest are notoriously short on rental housing for workers.

Finances can also be different. Those with portable low-interest mortgages can ignore everything I mentioned above; these lucky souls can move their mortgage to any new home, provided they follow their mortgage’s terms and conditions. And homebuyers with enough cash to buy a property outright will have different financial calculations to make.

Finally, price appreciation will look different across America. Price appreciation in a desirable Floridian retirement community might well exceed 7%, provided it doesn’t fall into the ocean.

But my math is geared toward the typical renter, a rent-burdened individual with far fewer savings than the average American. These families need to rely on mortgages to buy a home. And with mortgage rates far exceeding the average U.S. home appreciation rate, it’s far better to rent today and wait for better deals tomorrow.

On the date of publication, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.