It's no secret that renting a home has gotten more expensive over the last six years. Even with millions of foreclosed properties snapped up by investors and turned into rentals, demand has outpaced supply, putting upward pressure on rents.
Since consumer income has been stagnant, or grown very little during that time, rents have grown less and less affordable.
“In the past five years, a typical rent rose 15% while the income of renters grew by only 11%,” said Lawrence Yun, chief economist for the National Association of Realtors (NAR). “The gap has worsened in many areas as rents continue to climb and the accelerated pace of hiring has yet to give workers a meaningful bump in pay.”
New construction needed
NAR says it reviewed all the data on income growth, housing costs and changes in the share of renter and owner-occupied households over the past five years in metro areas across the U.S. Yun says the results show renters are being squeezed in many metro areas, including New York, Seattle and San Jose, Calif. He says the situation could get worse unless there is a meaningful increase in home construction.
More people are renting because they aren't buying. Though recent statistics show home sales are slowly rising, they are nowhere near the level they were before the housing market crash.
Yun says consumers who were financially able to buy a home in recent years were insulated from rising housing costs since most take out 30-year fixed-rate mortgages with established monthly payments. Their net worths have risen, albeit slightly, because of upticks in home values and declining mortgage balances.
“Meanwhile, current renters seeking relief and looking to buy are facing the same dilemma: home prices are rising much faster than their incomes,” said Yun. “With rents taking up a larger chunk of household incomes, it’s difficult for first-time buyers – especially in high-cost areas – to save for an adequate down payment.”
In recent months the inventory of homes, both existing and new, has been on the decline. Not only are there fewer to choose from, even if you wanted to buy one, sellers have more leverage and can ask more for their property. Yun believes a building spurt could help both buyers and renters.
But home builders have been hesitant since the housing crash to add supply because of rising construction costs, limited access to credit from local lenders and concerns that there may not be that many younger buyers.
Yun estimates housing starts need to rise to 1.5 million, which is the historical average. However, housing starts have averaged about 766,000 per year over the past seven years. Still, he's hopeful builders will at least target those markets where rents have risen the fastest.
“Many of the metro areas that have experienced the highest rent increases are popular to millennials because of their employment opportunities,” said Yun. “With a stronger economy and labor market, it’s critical to increase housing starts for entry-level buyers or else many will face affordability issues if their incomes aren’t compensating for the gains in home prices.”