FEBRUARY ISSUE: Rising Rents, Falling Payments—Cause for Worry?

Are renters now paying more than homeowners?

If you rent an apartment, you might have noticed that you’re shelling out more in monthly payments than your home-owning neighbor, friend or coworker.

That’s because, according to Zillow, buying a home is now more affordable than renting in urban clusters. The company’s third-quarter 2014 Affordability Index estimates that median-income buyers can expect to spend about 15 percent of their income on a mortgage payment today, compared to renters shelling out about 30 percent.

“Even for those first-time or lower-income Millennial buyers age 23 to 34 that are likely to earn less money and put less down on a home, buying a home remains more affordable today than it was in the pre-bubble period from 1985 to 1999,” the report states.

While interest rates remain low and home value appreciation continues to moderate, buying a home will continue to be more affordable than it has been in the past. Apartment dwellers, meanwhile, continue to struggle. Rents “are historically unaffordable in the largest 35 metro areas,” including Miami, San Francisco, New York, San Jose and Los Angeles.

Although these numbers are of mild concern to multi-family landlords and developers, they are by no means cause for panic, according to real estate analysts.

“It’s a longer-term issue that multi-family developers and owners will have to face, but I don’t think that measure of monthly payment versus mortgage payment is a sole alarm bell,” David Crowe, chief economist for the National Association of Home Builders, told CPE.

Thriving Rental Market

The apartment market is on track to keep thriving in coming years, and here’s why:

■ Financing is still an issue for younger consumers, especially since a big chunk of their income goes toward rent, making it difficult to save up for a house.

“Millennials have not necessarily started their careers at the level of pay they expected or that their predecessors had,” Crowe said. As a result, many younger people are unable to accumulate the cash required to cover a down payment and closing costs, said Crowe.

Underwriting standards are still unusually tight to obtain, making it difficult for Millennials facing college loan payoffs or other expenses to qualify for a mortgage.

“You can only spend a certain amount of your income on debt service,” said Richard Green, director of the University of Southern California’s Lusk Center for Real Estate. “So even if you’re spending only 15 percent of your income on your house, if you’re spending another 10 percent on student loans and 5 percent on your car, the lender might not like you.”

■ Demographics matter: Married couples are much more likely to buy a home than singles.

“The ownership rate among married couples is 80 percent; among singles, it’s 50 percent,” Green said. Even that 50 percent figure is inflated, since it counts homeowners who have been widowed as “single,” he added.

Furthermore, fewer people are getting married these days than in previous generations, and that adds a strong factor in the landlord’s favor, according to Green.

On average, apartment rents are expected to rise 4.5 percent for Class A and B+ assets and 5.1 percent for Class B and C assets, according to Pierce-Eislen’s recently released 2015 multi-family rent forecast and outlook report. That projected growth is lower than last year’s average 5.9 percent increase for all multi-family categories, but is still positive compared to previous years, the report states.

Tough Spot

Nevertheless, analysts agree that price escalation is of some concern for landlords. In many major markets, apartment residents feel caught between a rock and a hard place, unable to afford the rent for most typical apartments or make the down payment on a house.

Moreover, wages are either increasing too slowly to keep up with the cost of rental housing or declining in real terms. “This creates a problem for renters, even if they want to become homeowners: Saving for a down payment is becoming a harder and harder thing to do,” Green added.
Jack Kern, director of research at Pierce-Eislen, agreed. “There is widening income inequality and sluggish wage growth for low- and moderate-income workers,” he said.

To help alleviate some of this renter/potential homebuyer dilemma, analysts have offered several suggestions:

■ The federal government could help relax some restrictions on homeownership.

■ Congress could enact housing finance reform, clarifying the government-sponsored enterprises’ future and revising Dodd-Frank.

■ If construction in more expensive markets became easier, developers would increase inventory. This adjustment in supply and demand would help mitigate price increases.

“Our preference survey suggests that people still want to own and it’s present financial situations that are keeping them from achieving that goal,” Crowe concluded. “The oldest Millennials who’ve saved money and are secure in their employment, they’re going to move forward, but it’s a combination of relative rents to relative ownership, as well as the increasing financial ability to make that leap.”