Cost of Renting Outpaces Growth in Home Prices
By Burt Carey
With the U.S. Census Bureau reporting that home ownership has slipped to the lowest rate in 20 years, the number of families opting to rent homes has increased, and so have rental prices, according to Web portal real estate estimator Zillow.
The Census Bureau says home ownership in the U.S. dropped to 64.8 percent of the population in the first quarter of 2015, a downtrend that began from a peak of 69 percent in the fourth quarter of 2004. Zillow, which began measuring rental prices in 2010, has highlighted another facet of the real estate market that has been trending upward since at least 1995: Rental prices are on the increase.
In April rents grew at a 4-percent clip over the previous year, outpacing home values, which appreciated at an annual rate of 3 percent.
Census Bureau statistics show the median asking rent for vacant rental units grew from $440 per month in 1995 to more than $750 by the end of 2014. That tells just a piece of the story. Rental prices have soared in 20 of the largest 35 housing markets throughout the country in the past year. The Zillow Rent Index, or the median cost of renting a home, in those 35 markets is now $1,364 per month.
Rental growth has been outpacing home value growth for several months in some of the nation’s hottest markets. In San Francisco, rents started rising faster than home values in July 2014, and have been growing faster ever since on an annual basis. In Boston, annual rental growth has outpaced home value appreciation since August 2014.
Zillow reports that low mortgage rates have helped make buying a home more affordable than renting. On average, U.S. homebuyers can expect to spend about 15.2 percent of their income each month on a typical house payment. Renters, however, can expect to spend about 30 percent on a monthly rent payment.
“There are tremendous incentives to get into homeownership these days: mortgage access is improving, interest rates are low, and home values remain below prior peaks,” said Dr. Stan Humphries, Zillow chief economist. “But it will be increasingly difficult for many renters to realize these benefits as this country’s growing rental affordability crisis continues to worsen. More income going to rent means less going to savings for a down payment and other costs, keeping renters renting longer and feeding into the high demand that is contributing to rising rents in the first place. This cycle will be difficult to break, and is a symptom of the imbalances that still exist in the housing market as we struggle to get back to normal. New construction and rising wages will help, but neither is coming very quickly.”
Zillow estimates that over the next year, home value growth is expected to slow to 2 percent annually. In 2014, home values rose 4.9 percent.
A snapshot of median home prices compared to rental prices in the same markets shows how much more renters are paying in 2015 over 2014 rates (Source: Zillow):
Metro Home Value Index/Increase Rent Index/Increase
San Francisco $738,200 / 10.3% $3,162 / 14.9%
Denver $294,100 / 14.2% $1,868 / 11.6%
New York $379,400 / 0.8% $2,372 / 3.4%
Los Angeles $534,300 / 3.1% $2,498 / 5.6%
Philadelphia $200,500 / 0.8% $1,567 / 2.8%
St. Louis $133,700 / 3.3% $1,137 / 4.5%
Cincinnati $137,000 / 2.5% $1,244 / 6.2%
Kansas City $138,900 / 0.3% $1,240 / 9.5%
San Jose $873,600 / 11.9% $3,287 / 12.9%
Charlotte $159,200 / 4.5% $1,253 / 6.6%
United States $178,400 / 3% $1,364 / 4%