As rents soar and the supply of rental housing remains constrained, 2015 could be the tipping point, pushing more renters to home ownership.
While younger Americans may prefer the flexibility of renting, home ownership is becoming more enticing, financially. Fannie Mae and Freddie Mac recently announced new low-down payment loans, mortgage rates are still very attractive, and renting is just plain more expensive than owning in many metropolitan markets.
In 2014, U.S. renters paid a collective $441 billion in rent, up $20.6 billion, or 4.9 percent, from 2013, according to a new report from Zillow, a real estate company. That translates to $26 more per month for the average renter. In some markets, however, the increase was far more. San Franciscans paid over 14 percent more in rent, while renters in Denver shelled out nearly 11 percent more. New York City area renters had it the worst, paying more than 10 percent of all the rent paid in the nation.
"Over the past 14 years, rents have grown at twice the pace of income due to weak income growth, burgeoning rental demand, and insufficient growth in the supply of rental housing," said Zillow Chief Economist Stan Humphries. "Next year, we expect rents to rise even faster than home values, meaning that another increase in total rent paid similar to that seen this year isn't out of the question. In fact, it's probable."
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Jamille Ackerman has no desire to rent. A financial analyst in Washington, D.C., she is closing on a home in suburban Maryland in about two weeks.
"I don't believe in making someone else rich," said Ackerman, who is single and plans to move her father in with her.
This is not the first time the 32-year-old has invested in the housing market. She bought in 2007, at the height of the housing boom and then lost her home to foreclosure in 2011. Even after going through all the stress of rebuilding her credit, she still believes in home ownership.
"I prefer at my age to put my money towards a better investment. A home is an asset; an apartment, there is really not much in it for me as far as benefits," Ackerman said.
One of the biggest barriers to home ownership today is that so many renters are paying so much to their landlords, they are unable to save for a down payment. That will only get worse in 2015. While developers in 2014 started the largest number of new rental units in 25 years, there is still a short supply of rental housing, both single and multifamily, and that means rents will continue to rise.
"As we prepare for New Year's and the next home shopping season, we expect soaring rents to entice more people to the relative stability of home ownership, particularly younger potential buyers," said Zillow's Humphries.
Enticing is one thing; affording is another. Builders have not been active in the entry-level market lately, preferring the higher-margin move-up and luxury homes. Price gains are easing in the existing home market, but they are still rising, and the expectation is that mortgage rates will rise, as well.
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