Skyrocketing rents could soon encourage renters to become owners sooner than they initially planned.
“After completing a major demographic study projecting headship and homeownership rates through 2030, we concluded that demand for rental housing over the next 15 year will dramatically increase, and we as a nation are not prepared,” states a paper by the Urban Institute last June.
Laurie Goodman, the institute’s director of the Housing Finance Policy Center, was one of the authors of that paper and research.
“Our analysis projects that from 2010 to 2030, the growth in rental households will exceed that of homeowners by 4 million, with an increase of 13 million rental households and 9 million homeowner households. That’s five renters for every three homeowners,” she says.
Compared to the previous two decades, the increase in homeowners was almost twice that of renters even with the housing crash. So, with this big supply and demand problem, that means that rental prices in some areas is skyrocketing and could continue to go higher. In fact, rent growth this fall went to 5.2 percent – the highest since 2011, according to Axiometrics, an apartment research firm.
More and more apartment construction is happening, but not necessarily where it is needed the most. Multi-family construction dropped 15 percent from Sept. 2014 to Sept. 2015.
That also means that with high rent prices, some people feel they can’t save any money to buy a home in the near future. It’s a vicious cycle.
“If buying fits your lifestyle, then yes, it is a good time to buy a house. Housing is very affordable by historical standards,” Goodman says. “One of the biggest pros for buying a house is the fact that you can lock into your mortgage payment for up to 30 years compared to your rent which could increase every year.”
Homeownership Advantages outweigh Disadvantages
She adds that a con with house buying is that you will have taxes and insurance once you buy a home. But you also get the financial perks of building equity instead of making your landlord richer and getting some tax breaks like writing off any mortgage interest.
You also get to live like you want to live such as having a dog or two dogs. You can also play your music loud without people above and below you telling you to knock it off.
But as a homeowner, you don’t have the flexibility of moving quickly to some other area of the country without worrying about selling your home. You also don’t get the amenities such as a gym or swimming pool that is offered by apartment living cash is necessary for an early lease termination.
Homeownership Still Affordable in Most Areas
“Obviously, if you own a home, you will be responsible for all the maintenance and improvements,” Goodman says.
But when you look at housing costs relative to income, housing prices are still very affordable by historical standards despite increases over the last three years.
However, in some areas, finding a home to buy that is affordable is getting tougher because of lack of inventory and a big demand. Sellers not only are seeing two or three offers coming at them, some are getting a dozen offers on their homes in some of the highly desired cities.
Despite low interest rates, U.S. homeownership has been falling and is now at the lowest level since 1967 at about 63 percent, according to research from Apartmentlist.com, an online apartment rental marketplace that does research on rental data. Among the reasons for such a big dip are many including the fact that credit remains tight; the younger generation is delaying marriage, childbearing and buying a house; and the recession still lingers.
Renters becoming Cost-burdened
More than 43 million households in the U.S. now rent – the biggest amount ever. But half of those renters are considered cost-burdened – which means they spend more than 30 percent of their income on rent. So, let’s say a family of four rents makes $3,000 a month but $1,000 of that goes to rent.
More than a quarter of households are severely cost-burdened, with at least half their income going towards rent payments. The percentage of U.S. renters facing cost burdens has grown continually since 1960 when only 24 percent were cost-burdened and 38 percent in 2000. Since then, rents have continued to rise steadily, increasing by 3.2% last year – twice the pace of overall inflation. San Francisco continues to be the most expensive city to rent in with a two-bedroom apartment costing about $4,750 monthly.
Financial professionals say you should only be spending 20-30% of income for rent. That money that was supposed to be going toward saving for a down payment on a house is getting eaten up by rent.
More Millennial Homeowners in the Near Future
However, despite these high rents, millennials still plan to purchase homes but only after 2018. Right now, about 31.5 percent of the 18-34 year olds are living with their parents, — a jump from 27 percent 10 years ago.
“The large millennial generation still mostly in their mid to late 20s, is beginning to build their first independent households, which has always meant more renting,” Goodman says. “Once they enter their late 30s and 40s, about 10 years from now, they will help homeownership recover, as it historically has as generations have gotten older.”