The Rent Cost Crisis: 6 Things You Should Know About Renting vs. Homebuying

Posted by Laine Smith on 12/10/15 3:13 PM

Topics: Home Buying

There are 9 million more renters in the U.S. than a decade ago, the biggest jump on record. As rental demand continues to outstrip supply and median income growth lags, the price of renting is likely to continue on its upward trend. If you’ve been sitting on the homebuying fence, these alarming rent statistics will show that you’re likely better off buying a home sooner rather than later.

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The Cost of Renting

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Nearly half of all renters are considered “cost-burdened,” meaning they are spending more than 30 percent of their incomes on rent, according to an annual study by the Harvard Joint Center for Housing Studies. Of those cost-burdened renters, over half are severely cost-burdened, spending more than half their income.

Bottom line on renting vs. homebuying: Rental costs hit an all-time high in 2014 while homeownership remained cheaper than renting in all 100 of the United States’ largest metros and was 38% cheaper than renting overall.

Median Renter Incomes

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Renter incomes have not yet recovered from the recession. Though the last three years have seen gains, the median renter income is still below the 2008 median and even lower than the 2001 median.

Bottom line on renting vs. homebuying: If both rent and income grow in a line with a rate of 2% inflation, the amount of severely burdened renters will still increase 11% by 2025, according this study.

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Regardless of income level, the shares of cost-burdened households reached new peaks in 2014 among all but the highest-income bracket. The share of cost-burdened renters declined steadily with increased income:

  • Households earning $15,000-$29,999: 77 percent are cost-burdened (69% in 2001)
  • Households earning $30,000-$44,999: 48 percent are cost-burdened (37% in 2001)
  • Households earning $45,000-$75,000: 21 percent are cost-burdened (12% in 2001)
  • Households earning $75,000+: 5 percent are cost-burdened (3% in 2001)

Bottom line on renting vs. homebuying: Today’s median rent requires 30.1% of a renter’s income, compared to 25$ historically. In comparison, 15.3% of income is needed to purchase a median home today, compared to 22% historically.

Rental Burdens & Age Groups

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The share of rental cost burdens have risen across all age groups.  In 2001, about half of all renters in the under 25 and 65+ age groups were cost burdened. In 2014, 62% of renters under 25 and 55% of renters 65 and over were considered cost-burdened.

Bottom line on renting vs. homebuying: Homeownership continues to be the cheaper option for Millennials in 98 of the 100 largest U.S. metros, according to the 2015 Trulia Rent vs. Buy report. Overall, buying a home is 23% cheaper than renting for Millennials.

Rental Burdens & Location

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Rental affordability affects renters in every state of the country, with cost-burdened households ranging anywhere from one-third to well over half of the renter population. Thirty-seven percent of renter households in every state spend more than 30 percent of their incomes on housing.

Why Now is a Good Time to Get Out of the Rental Circuit

  • Rental vacancy rates hit their lowest percentage since 1985 in June 2015. Because of this, economists are expecting rental rates to expand even further next year as supply is unable to meet renter demand.
  • Mortgage interest rates are still near historic lows but could increase in the near future as the Federal Reserve is predicted to raise the federal funds rate at their mid-December meeting.
  • Credit requirements have eased for home financing. A Wells Fargo survey found that two-thirds of Americans believe they need a “very good” credit score (over 780) to buy a home. In reality, a minimum score of 620 is required by all loans delivered to Fannie Mae. Currently, Compass Mortgage has the ability to finance FHA loans with credit scores as low as 580.
  • Consistency in your housing payment. Renters saw a 5% increase in rental prices from 2013 to 2014, according to a Zillow report. Homeowners with a fixed-rate mortgage enjoy knowing their housing payment is going to remain the same for the life of their loan, unlike rental payments.
  • Low to no down payment loan programs are available. An increase in rental prices could affect renters who are trying to save for a down payment. Low down payment mortgage options include FHA, USDA Rural Development, @HomeIllinois and MyCommunityMortgage®.

If you’re interested in buying a home, the best way to determine your mortgage eligibility and affordability is to meet with a mortgage banker for a pre-approval. If you’re planning to purchase your first home, download our free Mortgage 101 Handbook for everything you need to know about buying and financing your first home.

Download: Mortgage 101 Handbook

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