Will Rising Rents Boost Home Sales?

Patrick Barnard
Written by Patrick Barnard
on March 17, 2015 No Comments
Categories : Blog View

BLOG VIEW: The average rent for an apartment in the U.S. has risen between 11% and 15% in the past five years, narrowing the gap between rent and household income to a level that is ‘unsustainable,’ a report from the National Association of Realtors (NAR) finds.

‘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,’ says Lawrence Yun, chief economist for NAR, in a statement.

Yun points out that the situation could worsen unless new home construction significantly rises. Unfortunately, it's kind of a Catch-22 situation in that home builders are not keen on starting new developments unless they know buyers are already lined up and ready to go.

What I find interesting is that NAR's report says rising rents will have the effect of keeping young people stuck in renting – in other words, that they will never be able to save enough money for down payment because rents are rising so much faster than wages. This is in contrast to Freddie Mac's U.S. Economic and Housing Market Outlook for March, which predicts that rising rents will force many young people to consider buying a home. So, which is it?

My theory is that those millennials who have been living at home or ‘shacking up’ with multiple roommates in ‘affordable’ rentals during the past several years are the ones who will be best positioned to buy a home over the next three to five years. Unfortunately, I think the number of millennials who have been renting at fair market prices far exceeds the number that have been living at home. As NAR's report finds, rising rents are likely to keep these young people locked in a cycle of renting for while – at least until wages increase.

What I would like to see is some research showing how many renters are becoming homeowners each month. For example, of the mortgage applications tracked by the Mortgage Bankers Association each week, how many are submitted by millennials living at home and how many are submitted by millennials who rent? I think it would be an interesting thing to track because it would show how significant the barriers are to transitioning from renting to buying – plus, it would show how many young people are transitioning from living with their parents to becoming homeowners.

When he asked for some feedback, I recently told the CEO of a prominent loan origination system provider that tracks application volume that they should break out more of this type of data: For example, among the people who applied for mortgages in any given month, how many were millennials? What was their household income? What are their work backgrounds? Breaking application volume down by geographic region would also be an interesting thing to track, in my opinion. I know at least some lenders must already be tracking this data as part of their marketing efforts.

As the NAR report points out, ‘Those 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.’

To me, the word ‘insulated’ also applies to millennials who have been living at home.

‘Furthermore, a typical homeowners' net worth climbs because of upticks in home values and declining mortgage balances,’ NAR says. ‘The result has been an unequal distribution of wealth as renters continue to feel the pinch of increasing housing costs every year.’

What I find interesting is how the age-old debate over which is riskier – buying or renting – has shifted in recent years. Whereas homeownership has traditionally been the preferred route in this country, I've heard many young people say in the past year or so that buying a home is too risky, simply due to the threat of foreclosure and subsequent loss of equity. With renting, there are no surprises, no expensive repairs when a roof starts leaking or a furnace fails. Some have told me that they never want to face the feeling of profound loss one has when they lose a house to foreclosure – on an emotional level, it's not the same as being evicted from an apartment.

On the other hand, I've heard almost as many young people say that renting is riskier, simply because one has no control over rent increases. As NAR's report shows, the increases in average rent in the major cities over the past five years have been absolutely staggering: Cities that saw the biggest increases in rents since 2009 are New York (50.7%); Seattle (32.38%); San Jose, Calif., (25.6%); Denver (24.14%); and St. Louis (22.26%).

Ironically, these increases are partly due to the fact that millennials are flocking to these cities for jobs – which, in turn, produces extra demand for rentals. A December report from RealtyTrac shows that buying is still more affordable than renting in the majority of U.S. housing markets; however, the opposite is true in markets with the biggest increase in the millennial share of the population over the last six years.

‘Many of the metro areas that have experienced the highest rent increases are popular to millennials because of their employment opportunities,’ Yun says. ‘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.’

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