It’s now about half as expensive to be a homeowner than it is to rent in the United States. That’s the conclusion of a new study by the real estate website Zillow, which tracked the monthly allocation of income toward mortgage, or rent for those who did not own their own home. As of the third quarter of 2014 they found that renters paid an average of 29.9% of their monthly income toward rent, compared to an average of 15.3% for homeowners. The study aimed for impartiality by measuring only a segment of the population who owned the average home in their market, versus renters.
Although Zillow has a reputation for over-inflating and bungling property values, their data on this survey is sound. That’s big news considering the average percentage of income to pay a mortgage and own your own home was 22.1% from 1985-1999, the period before the real estate boom and subsequent crash. And while the numbers point to the fact that owning a home is cheaper than ever, renters have seen a steady and dramatic increase in housing expenses. The 29.9% proportion that Zillow discovered is up from a historical average of 24.9%.
In California, we see a several prize cities with exorbitant rental costs and mortgage costs. In Los Angeles, homeowners pay 40.8% of their income toward mortgage but renters pay 47.9%. In San Francisco, those with a mortgage have to write a check for 41.5% of their income while renters pay even more: 45.9%. Homeowners in San Diego have it much better, paying only 34.1% of their income to their mortgage, though renters pay 42.5%.
In our own local Sacramento metropolitan area, people who own a home pay an average of 25.6% toward their mortgage – an extremely low percentage. Renters in the area, on the other hand, pay 32.2%, a significant 6%+ increase compared to owning.
There are several factors that contribute to this affordability gap between owning and renting, now the biggest ever.
During the recession, millions of homeowners lost their residences to foreclosure or short sales, pushing increased numbers into the rental market and supplying upward pressure on rents. Tightening lending standards, low wages, and lack of consumer confidence kept them out for a few years.
Now, the longer-than-anticipated benefit of low interest rates is keeping mortgage costs low and bringing more and more buyers into the market, particularly first timers and those who are buying homes in the bottom range of prices, that they can afford. But at the same time, incomes have been flat, showing no significant growth, and demand for rentals has allowed landlords to keep raising the cost to live in their properties.
Since 2009, when the average national rent was approximately $1,020, rental prices have increased by 5% per year, until now the average American renter pays around $1,200 per month.
There are now 43 million rental households in the United States, totaling about 35% of all homes, the highest level in over a decade.
Currently, half of all U.S. renters pay more than 30% of their income to rent every month, which is the accepted barometer for housing affordability. That’s a marked increase from only 18% of renters paying more than 30% of their income a decade ago.
The problem is even worse for those on the lower end of the economic scale, and an astounding 30% of renters pay at least 50% of their income to housing costs. California is one of those states where at least half of all renters pay more than 30% of their income toward rent.
According to U.S. Department of Housing and Urban Development, the average hourly wage among all renters is $14.32, yet it takes at least $18.79 to afford an apartment at fair market rent. The Fed calls reports that the ratio of rental costs to disposable income is the worst level since the Great Depression.
What does this all mean? With renting more expensive than ever – twice as much as owning a home for many Americans – interest rates low, and the return of low-money down loans, there’s never been a better time to own your own home, and save a lot of money in the process.