Zillow: Homeownership Surpassing Renting in Affordability

By Keith Loria, Contributing Editor

The July Zillow Real Estate Market Report reveals that of the country’s 100 largest metro areas, only 12 are currently more affordable than they historically have been for both renters and homeowners.

The report shows that widespread growth in housing costs continues to outpace wage growth with national U.S. home values rising 6.5 percent year-over-year in July. Additionally, renting is more expensive than ever in many areas, making it difficult for renters to save for a down payment on a home.

“The health of the for-sale real estate market is directly tied to the health of the rental market. While mortgage affordability remains very high, because rental affordability is so low, it’s likely many current renters that would like to buy in the next few months and years will have great difficulty saving the necessary down payment for a home as more of their income is devoted to rent,” Dr. Svenja Gudell, Zillow’s director of economic research, told Commercial Property Executive. “In order for affordability to remain reasonable, home value and rental growth will need to slow, and/or incomes will need to rise. Both are happening, but very slowly.”

According to Zillow, homes remain more affordable to buy in 94 of nation’s 100 largest metros compared to historic averages, yet renting is more expensive than ever in 88 of the same markets.

“Home values experienced a huge drop during the recession, and remain about 11 percent off from their 2007 peaks. This means homes in many markets can still be had for a relative bargain compared to the recent past,” Dr. Gudell said. “Coupled with very low mortgage interest rates, homes are more affordable than ever in many areas. But renters can’t take advantage of low interest rates. And rents themselves didn’t experience the huge drop that home prices did, and instead have largely kept rising fairly steadily over the past decade.”

Data in the report shows that the Home Value Index rose to $174,800 in July, up 0.2 percent from June 2014 and 6.5 percent from June 2013. After three months of flat or negative monthly growth, national rents rose 0.6 percent in July from June, to a Zillow Rent Index of $1,318.

“In most of the country, homeownership remains very affordable. In just a handful of markets—most notably the Bay Area and Southern California—home buyers should expect to pay more of their incomes to a mortgage now than they did in the past, but those areas are the exception to the rule,” Dr. Gudell said. “On the flip side, in most areas of the country, renters should expect to pay more of their income to rent than they did in the past. There are only a dozen markets nationwide where it is both more affordable to rent or to buy a home than it was in the past.”

Those markets are Albany, N.Y., Augusta, Ga., Bakersfield, Calif., Buffalo, N.Y., Fresno, Calif., Hartford, Conn., Pittsburgh, Pa., Spokane, Was., Springfield, Mass., Syracuse, N.Y., Worcester, Mass., and Youngstown, Ohio.

From the numbers, it’s apparent that rental affordability is currently much worse than mortgage affordability, largely because rents didn’t experience the huge drop seen in home values during the recession, and instead have just kept climbing upward.

Another chief takeaway of the report is that as rents keep rising, along with interest rates and home values, saving for a down payment and attaining homeownership becomes that much more difficult for millions of current renters, particularly millennial renters already saddled with uncertain job prospects and enormous student debt.

According to Humphries, in order to combat this phenomenon, wages need to grow more quickly than they are, particularly for renters, and growth in home values will need to slow.

Other figures of note from the report include: Nationally, renters signing a lease at the end of the second quarter paid 29.5 percent of their income to rent, compared to 24.9 percent in the pre-bubble period. Meanwhile, U.S. home buyers at the end of the second quarter could expect to pay 15.3 percent of their incomes to a mortgage on the typical home, far less than the 22.1 percent share homeowners devoted to mortgages in the pre-bubble days.

Zillow predicts mortgage rates will rise in the upcoming year. The report says that when mortgage rates hit 5 percent, still very low by historical standards, the number of unaffordable metros for homeowners among the top 100 will more than double, to 13. At 6 percent mortgage interest rates, the number of unaffordable metros will almost double again, to 24.