Untitled Document

Renters can’t afford to rent — but they could afford to buy

buying your first home
Reading Time: 4 minutes
Sept. 12, 2018.

Right now, renters face a golden opportunity. For the first time in eight years, renters rule in 16 of 23 major U.S. cities, but not all renters are happy. Three-quarters of renters still want to become homeowners, and at least 31 percent of renters make enough to do it. Buying your first home is more affordable than you realize.

Renters can afford more than they think

The last documented rise of the renter began in June 1999 and lasted until January 2010, when the U.S. housing market again turned in favor of the homeowner. Homeowners have held the lead for the past eight years, until rental rates recently increased in cities like Houston, Dallas, Denver, Atlanta, Miami, Honolulu, San Francisco, Los Angeles, and Seattle.

But in even the priciest cities, homeownership is still possible. Over one in four renters could afford to own in typically “priced-out” cities like Seattle and San Francisco where renting has surged, the Urban Land Institute (ULI) found.

This breaks down to:

  • Homeownership is affordable for at least 18 percent of American renters.
  • More than 29 percent of Washington, D.C., renters now earn enough to buy a home, along with roughly 24 percent of San Francisco renters.
  • The National Housing Affordability for Renters (HARI) rises as high as 31 percent in a city like St. Louis, Missouri, where homeownership rates exceed 68 percent.

Here’s another affordability bombshell that has renters rethinking. Low- to mid-income renters earning minimum wage can no longer afford to rent a two-bedroom apartment anywhere in the U.S.

Renters are still renting, as the latest numbers indicate. Many renters have been put off by this summer’s “hot” headlines — rising prices, bidding wars, and inventory shortages have made local markets tight. Fortunately, real estate economists predict that’s all about to change.

Find a better way home. Click here to fly into your mortgage and own in 10 days.*

Housing prices can’t take the heat

The newly emerging “renter’s market” creates pressure. Put enough pressure on housing prices, and they’ll be forced to fall, Ken Johnson, Ph.D., a real estate economist among the creators of the FAU’s College of Business Index, says.

Johnson estimates that today’s rise in renters will probably lead to a pricing slowdown in many housing markets. In the coming weeks, renters may see:

  • More affordable homes pop up in the Midwest and Northeast, i.e., cities like Cleveland and Chicago with optimal homeownership scores.
  • Housing prices drop in especially hot markets, already starting in LA and San Francisco.
  • Overall “significant price declines in [sic] residential housing prices,” Johnson says.

Some areas, like Dallas (pegged as one of the least affordable areas based on BH&J Index numbers), may still be tough for buyers. But compared to a year ago, the housing market is looking good.

In 2017, Harvard University found that more than 40 million Americans were living in unaffordable housing. Today, rental rates have hit an eight-year high at a time when as many as a third of renters can afford to buy.

Adding to the incentive, renters really want to own. Roughly 75 percent of non-owners still consider homeownership an important part of the “American Dream.” As Lawrence Yun, NAR chief economist, explains, “Housing demand in 2018 will be fueled by more millennials finally deciding to marry and have kids and the expectations that solid job growth and the strengthening economy will push incomes higher.”

Renters make $70,144 in buyer-friendly markets**

Every market is unique, but most renters are surprised to find how quickly homeownership pays off once they crunch the numbers.

For example:

  • A renter paying an average $1,429 in monthly rent in San Antonio, Texas, can expect to pay up to $1,810 within a decade with an annual 3-percent rental increase.
  • The same renter who buys a $200,000 house now may have a $966 monthly mortgage payment at today’s 5 percent interest.
  • As this new owner’s home appreciates an estimated 2.58 percent a year, their home’s value may spike to $251,613 — a gain of $51,613 in less than a decade.
  • Factoring in combined appreciation and amortization gains, this homeowner will have a net gain of $70,144 in just nine years.

Buying your first home at today’s rates and lower prices could yield a lower monthly mortgage payment. Renters who buy now will also build equity as housing prices rise over the long-term, while escaping the added cost of rising rent.

Finding out if it’s the right time to buy in your area can be easy. Start by connecting with a local loan officer and requesting your customized rent-versus-own analysis. Counting the cost with the help of a professional makes it easier to make a smart choice.

*10-day close not typical and not all loans will close in this timeframe.
**Loan and monthly payment buying scenarios used for informational purposes only and does not reflect actual terms of loan offered. This document should not be construed as investment or mortgage advice or a commitment to lend. Your results may vary. There are no guarantees, promises, representations and/or assurances concerning the level of accuracy you may experience. For actual and current terms and rate information, please contact your lender directly. APR of 5.074% assumes a 5.000% simple fixed interest rate assuming $2,068 in fees included in APR. Monthly principal and interest payment based on a fully amortizing fixed interest loan of $180,000 with 360 monthly payments at the assumed simple interest rate and 20% down payment. Lender is not a tax consultation firm. Please seek advice from a tax professional. Source: MBS Highway.
For educational purposes only. Please contact a qualified professional for specific guidance.
Sources deemed reliable but not guaranteed.