Financial concerns are the top reason renters aren’t becoming homeowners

September 11th, 2014

Many renters haven't become homeowners because they think they don't have enough money saved or too much debt.

For some time now, housing market analysts have been attempting to find the cause behind declining homeownership rates because fewer renting Americans are becoming homeowners. The latest U.S. Census Bureau report on homeownership was evidence of this trend, as the data showed the rate dropped from 65 percent in the second quarter of 2013 to 64.7 percent in the second quarter of 2014.

Often, reports have turned to rising student debt and an increasingly mobile millennial generation as the cause for declining interest in owning a home. While some analysts have disputed these assertions, consumers do report that financials are a barrier to homeownership, according to a recent report from the Federal Reserve Bank of New York.

The data, which is based on the New York Fed’s Survey of Consumer Expectations, revealed the top obstacles reported by survey respondents were not having enough money saved or having too much debt. These concerns were followed by consumers’ belief they didn’t make enough money and their credit wasn’t good enough to qualify for a mortgage. Reasons tied to mobility – including the desire or need to move freely or the expectation that staying in one place isn’t feasible – were farther down on the list.

Employment growth isn’t met with wage gains
It is interesting to note the top concerns for consumers were all tied to financial issues, as the fact speaks to the prevailing problem of slow wage growth in the U.S.

“We see that the main reasons preventing renters from becoming owners are weak balance sheets (low savings or high debt), low income and lack of access to credit,” the New York Fed said.

Without the earnings potential to overcome these challenges, it is no surprise renters are delaying their homebuying expectations. The employment sector has been producing positive news throughout 2014, but wage growth simply cannot keep up with home price appreciation, The Wall Street Journal reported. Between July 2012 and 2013, for instance, home prices rose 13.6 percent, but wages went up only 2 percent.

Many consumers can’t find affordable homes
Although investors and cash buyers are starting to pull out of the housing market, thereby lessening competition for mortgage-dependent buyers, many potential home buyers are already priced out of the market, RealtyTrac reported.

“The good news is that fewer cash buyers should help loosen up inventory of homes for sale and reduce competitive bidding, giving first time homebuyers and other non-cash buyers more opportunities,” said RealtyTrac Vice President Daren Blomquist. “The bad news is that some of those first time homebuyers and other non-cash buyers may already be priced out of the market thanks to the rapid run-up in home prices over the past two years in many areas.”

One piece of good news is that mortgage rates have remained at lower levels. Freddie Mac’s latest Primary Mortgage Market Survey revealed the average interest rate for a 30-year fixed mortgage was 4.12 percent in the week ending Sept. 11, a slight increase from 4.10 percent the previous week. Compared to the same time a year ago, the average was down from 4.57 percent.

Despite economists’ projections that rates would climb near 5 percent in 2014, they’ve been hovering at lower levels for the past few weeks. According to The Washington Post, political unrest – particularly in the Middle East and Ukraine – as well as weak economic activity in the U.S. are keeping rates low.

“When the economy is doing better, people take more risks and demand more homes, which pushes up mortgage rates,” said Len Kiefer, Freddie’s deputy chief economist, according to the Post. “When the economy is not growing, it keeps interest rates down.”