Friday , 2 June 2017
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How the Rent Trap is Killing Off First-time Buyers

This is the year when the stars are aligned perfectly for record numbers of tenants to tear up their leases and kiss the renting life good-bye.

Historically low mortgage rates won’t last much longer.  Home prices will only rise. New three percent down programs from Fannie and Freddie sweeten the deal for new buyers.  FHA’s mortgage insurance premium cut makes FHA affordable again.  Incomes are up.

To top it off, greedy landlords are practically pushing their tenants out the door.  Rents are rising every month, stinging tenants with unexpected expense.  In market after market, rent vs buy comparisons show renters how much they are losing by staying put.  According to Reis, Inc., the average US monthly rent has climbed 14 percent in the past five years—double the rate of home price appreciation.  Rents rose 3.5% last year according to Zillow, which forecasts another 3.5% hike this year. Rents are forecasted to keep rising in 2016, though record numbers of new apartment openings are expected to slow down increases to about 2 percent, according to Zillow.

So where the heck are the floods of new homebuyers?

April sales reported a blip but certainly no breakthrough. Brokers report lots of traffic but not the “year of the Millennial” boom some experts forecasted.  Sales to first-time buyers are doing a little better than last year, which was one of the worst on record for first-timers, returning about to the same market share as in April 2013 but lower than the 33 percent average for 2014 and far below the 40 percent average considered normal, according to NAR’s Realtor Confidence Index survey.

These results are confirmed In California and the MidAtlantic region and elsewhere where sales in entry-level price tiers are up 10 to 13 percent over last April but about the same as 2013.

Perhaps it’s just a matter of time before first-time buyers weigh in this season.  However, a recent study by Freddie Mac suggest something very different is going on.

“We’ve found that rising rents do not appear to be playing a significant role in motivating renters to buy a home,” said David Brickman, EVP of Freddie Mac Multifamily. “This contradicts what some in the housing market think as they expect more renters ought to be actively looking to purchase a home. We believe rising rents are primarily a sign of increased demand rather than a signal that home purchases will be increasing.”

The survey found that more than a third (38 percent) of renters who have lived in their home two years or more experienced a rent increase in the last two years. Seventy percent of those would like to buy a home but cannot afford to at this point. Half (51 percent) said that because of the rent increase they now have to put off their plans to purchase a home. Some 44 percent indicated they’d like to buy a home and have started looking.

Instead of acting as an incentive to buy a home, rent hikes are keeping renters captive by unexpectedly siphoning off cash that otherwise might have been saved to pay a down payment and closing costs.  Even to save the 3 percent down required of the new Fannie and Freddie programs, it takes two years or more for the average first-time buyer to muster enough for a down payment, according to the FHFA. Every time the rent goes up, it’s going to take a little longer to save enough to become a homeowner.

Historically, U.S. renters making the national median income could expect to pay about 25 percent of their income on a typical apartment. Today, renters should expect to spend roughly 30 percent of their income on the median apartment nationwide, according to Zillow’s Meredith Miller.

As more renters find themselves locked into an apartment or single family rental, they will help to keep vacancy rates low which, in turn, will put upward pressure on rents.  Meanwhile, interest rates will surely rise and the price of starter homes as well.  Higher prices will require larger down payments and more costly closing services and fees.  The Freddie and Fannie 3 percent down programs may not last long.  For those still dedicated to homeownership, the wait will become even longer.

What are the odds that after a couple of years on this hamster wheel a sizable percentage of that 70 percent of renters who would like to own homes tosses in the towel?

Welcome to the rent trap.






  1. Indeed it is odd that there was no turnout of home buyers, considering the timing. Just about everyone predicted otherwise. I hope the window of affordable homes lasts longer rather than shorter.

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