December 18th, 2014
Throughout the housing recovery, reports have often shown that buying a home is more affordable than renting, and a recent report from Zillow reveals the gap between the two housing options continues to the grow.
According to the report, renting is half as affordable as buying. This is indicated by the share of income U.S. residents can expect to spend on each housing option. While homeowners can spend 15 percent of their income on housing, renters can expect to spend 30 percent.
“Despite rising home values, homeownership remains very accessible for buyers that can scrape together a down payment – even a relatively modest one – find a home to buy and secure financing,” said Stan Humphries, Zillow chief economist.
Humphries went on to say he predicts many younger renters will transition to homeownership in 2015 to escape high rent prices. Realtor.com Chief Economist Jonathan Smoke shares this sentiment, as millennial job growth is encouraging more members of this generation to buy a home, Inman News reported.
Which markets are expensive for renting?
While rent prices are going up across the country, some areas are much more unaffordable than others, according to a separate Zillow report. In San Francisco, for instance, renters must earn $79 per hour to afford median rent, which equals an annual salary of more than $150,000 each year. Silicon Valley, California, markets also boasted expensive median rent, with Atherton requiring renters to earn at least $193 per hour and Menlo Park requiring $103 per hour.
Other expensive large metro areas include Boston ($50 per hour), Los Angeles ($49 per hour), New York ($44 per hour) and Seattle ($44 per hour). Surprisingly, rent prices were actually affordable in these markets prior to the recession though they were the most expensive markets for buying back then, according to Zillow. Furthermore, although younger buyers typically spend more for a down payment than their older counterparts, buying a home is still more affordable for this group.
Considering these trends, millennials and other buyers are better off purchasing a home while the costs of ownership remain more affordable. Additionally, with Fannie Mae and Freddie Mac soon offering loans with down payments as low as 3 percent, buyers who can’t muster a 20 percent down payment can have access to the mortgage credit they need while interest rates remain around historical lows.