Rents Rise, Ownership Costs Fall, Part Deux

The squeeze renters will feel over the next twelve months will not be pleasant, especially for lower income renters.  But those who can afford to buy in 2015 have multiple incentives to do so, beginning with their monthly rental bill.

In a new piece of research on the dynamics of renting vs. buying, Zillow’s economists have update the numbers on what renters can expect in the months to come.  (see http://www.realestateeconomywatch.com/2014/12/rents-will-rise-faster-than-home-values/ for earlier Zillow findings.)

Here are the headlines:

• Even first-time buyers with low down-payments can expect to pay just 17 percent of their income toward mortgage payments as rents soar
• Homebuyers should expect to spend 15.3 percent of their incomes on mortgage payments for a typical home. Renters should expect to pay twice as much — 29.9 percent of their median incomes — to rent.
• Likely first-time, 23-to-34-year-old buyers should expect to spend 17.4 percent of their monthly income on house payments. Historically, they spent about 22.5 percent of their income to purchase a home.
• It was 30.8 percent more affordable to buy a home in the third quarter of this year than it was in the pre-bubble years (1985 -1999). It was 19.8 percent less affordable to rent, compared to the pre-bubble years.

On average, U.S. home buyers making the nation’s median income and purchasing the typical U.S. home spend 15.3 percent of their income on their monthly house payment, down from the historical norm of 22.1 percent during the pre-bubble period from 1985 to 1999. On average, U.S. renters spent 29.9 percent of their monthly income on rent in the third quarter of 2014, up from 24.9 percent historically.

Younger buyers, earning less money in many areas and making smaller down payments on a home, should expect to spend slightly more of their income on mortgage payments – 17.4 percent. Homes for younger buyers remain affordable thanks to continued low mortgage interest rates and their tendency to shop for less expensive homes.

Continuously rising rents across the country could drive more people into the home-buying market, but they also make it more difficult for first-time buyers to save for a down payment. Washington, DC renters can expect to spend 27.1 percent of their income on rent, up from 16.2 percent historically. In Miami, rent as a percentage of income has risen from 26.5 percent before the bubble to 44.5 percent currently.

“Despite rising home values, homeownership remains very accessible for buyers that can scrape together a down payment – even if that down payment is relatively modest – find a home to buy and secure financing,” said Zillow Chief Economist Dr. Stan Humphries. “But what keeps me up at night is the fact that it still remains so difficult for so many potential buyers to make those particular stars align, largely because renting is so unaffordable these days. It’s very difficult to come up with a down payment when so much of your monthly paycheck – especially on an entry-level salary – is going to your landlord instead of into your savings. Buying conditions are getting better every day, and in time the allure of fixed housing payments and building wealth through home equity will draw more buyers out of rentals and into homeownership.”

Homeownership rates in the U.S. have steadily declined, even as the housing market has recovered, in part because millennials have delayed their entry into the housing market. But it is likely that by the end of 2015, millennials (aged 23-34) will overtake Generation X as the biggest group of U.S. homebuyers, a transition aided by widespread home affordability.