Why fewer renters are becoming homeowners
It may be a great time to be a landlord, but it's a lousy time to be a renter.
Renters across the country are paying more for their apartments, putting a stranglehold on their financial flexibility and their ability to save for a down payment on their own property. Fewer renters today say they believe they'll be able to buy a home in the next year, according to a new report from Zillow, and that could put a crimp in the U.S. housing market's recovery.
The current decade is on track to be the strongest period ever for renter growth, thanks to the legions of millennials who entering the workforce, according to researchers at Harvard's Joint Center for Housing Studies. That's good news for landlords, but rent checks are eating up a bigger share of workers' paychecks, given that rents in 2014 rose at double the rate of inflation.
The share of renters from 25- to 34-years-old who are shelling out more than one-third of their income to their landlords has jumped to 46 percent from 40 percent over the past decade, Harvard noted.
Those higher rents may be eating into some Americans' ability to save for down payments for home purchases. The percentage of renters who said they intend to buy a home in the next 12 months has fallen to 11.4 percent, compared with 12.1 percent six months ago, Zillow said. The survey polled 10,000 renters and homeowners about their plans for buying homes and the conditions of their local markets.
"The housing market is slowing down, and Americans' confidence in the future of the market is understandably fading a bit, too," said Zillow chief economist Svenja Gudell in a statement.
Not surprisingly, renters in the more expensive U.S. cities said they're less likely to buy a home compared to renters in cities with a lower cost of living. Only 8 percent of renters in San Francisco, the country's most expensive housing market, said they plan to buy a house in the next year, compared with 18 percent in the more reasonably priced Philadelphia, according to Zillow.
Without new home buyers, the housing market could be facing some headwinds.
That's because the market would be relying on existing homeowners to upgrade or relocate to generate sales, a trend that has been buffeting the housing sector for years. First-time home buyers dropped out of the market after 2009, following the real estate bust. Aside from a slight bump in 2010 due to the tax credit aimed at first-time home buyers, their percentage has stagnated.
Of course, the housing market has improved in the last few years, with cities such as San Francisco and New York City witnessing especially strong home value appreciation. That's bringing builders back and boosting housing starts by 0.2 percent in July, to the highest level since 2007, according to PNC Financial Services Group. Still, the rebound in homebuilding has been led by multifamily structures as developers focus on apartment buildings and other rental properties, PNC noted.
One big "what if" is whether the Federal Reserve will boost interest rates at some point this year. The Fed has signaled it will do so incrementally, which means the current near-record low mortgage rates could inch higher. Still, that could prompt some renters to consider jumping into homeownership to lock in rates before they rise even higher -- if they can scrape together a decent down payment.
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