Rent prices shot up in 2014, could prompt rise in homeownership

January 5th, 2015

With rent prices on the rise, consumers may have more incentive to transition to homeownership.

Demand for rental properties took off in 2014, forcing a rise in rent prices, according to Zillow.

The online real estate listing site said Americans saw an overall rent spending increase of $20.6 billion in 2014, rising from $420.4 billion in 2013 to $441 billion this year. This represented 4.9 percent growth. Zillow Chief Economist Stan Humphries explained rent prices have been outpacing income for the past 14 years, with the former growing two times faster than the latter.

“This has created real opportunities for rental housing owners and investors but has also been a bitter pill to swallow for tenants, particularly those on an entry-level salary and those would-be buyers struggling to save for a down payment on a home of their own,” Humphries said.

Zillow Senior Economist Skylar Olsen shared a similar view in a telephone interview with Bloomberg. Also, he noted a positive effect of higher rent prices, which is that the increases give potential homebuyers more push to take a leap into the housing market.

Rent prices to continue rising
While vacancy rates have dwindled, demand hasn’t faltered. Additionally, wage growth has been sluggish despite employment gains. These factors contribute to rent price acceleration, and Humphries doesn’t expect this appreciation to stop in 2015.

“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,” Humphries said. “In fact, it’s probable.”

Home price moderation is evident in CoreLogic’s latest Home Price Index, which showed a 0.5 percent gain for prices from September to October when including distressed sales. When excluding distressed sales, prices rose 0.6 percent month over month. CoreLogic Deputy Chief Economist Sam Khater commented on the price moderation, noting appreciation is at half steam compared to activity in the past spring.

With price growth slowing while Zillow expects rent prices to shoot up 3.5 percent in 2015, prospective homebuyers may want to make the transition sooner rather than later.

Where rent prices increased the most
Zillow provided a breakdown of the 50-largest metro areas in the U.S., which revealed the markets that had the highest rent price growth in 2014. Potential buyers in the pricier markets may be more inclined to take Olsen’s advice.

In San Francisco, for example, renters spent $14.6 billion in rent in 2014, representing a 13.5 percent increase from $12.8 billion in 2013. Denver and Pittsburgh had the second- and third-highest rent price growth, rising 10.8 percent and 10.6 percent, respectively.

Addressing affordability concerns
Although Olsen’s assertion that rent prices will encourage consumers to transition to homebuying seems reasonable, some potential buyers are still worried about affordability, according to Redfin. Despite price moderation, the majority of consumers surveyed by the real estate brokerage listed rising home prices as their top challenge to becoming a homeowner.

Additionally, most respondents expect prices to rise at least a little in 2015. District of Columbia Redfin agent Leslie White said many consumers are putting their aspirations on hold and renting for another year, as they can’t find affordable homes. If they don’t take this option, they’re looking into smaller properties or ones that are farther from metro centers.

One positive is Redfin expects the inventory of homes listed for less than $300,000 will increase in 2015. This change can help persuade those consumers who still don’t see buying as a more attractive and financially viable option compared to renting. Furthermore, extra inventory could address the second-biggest roadblock for Redfin respondents, which was the quality of homes on the market.