Q3 2016 Housing Affordability: Renting More Affordable Than It’s Been in Two Years
- Renters in Q3 could expect to pay 29.3 percent of their income on the typical U.S. rental home, an improvement from Q2 and a year ago and the lowest level in two years – but still well above historic norms of 25.8 percent.
- U.S. home buyers in Q3 could expect to spend 14.2 percent of their income on a typical mortgage, unchanged from Q2 and well below historic norms of 21 percent.
- Mortgages remain more affordable than renting largely because of the large reset in home values experienced during the recession, which has yet to fully reverse in most areas, and very low mortgage interest rates.
Incomes are growing, and growth in rents is slowing – leading to a (very) modest, but welcome, improvement in overall U.S. rental affordability in the third quarter.
Americans making the national median annual household income (approximately $57,397) and looking to pay the national median rent ($1,403 per month) could expect to pay 29.3 percent of their income on rent each month as of Q3 2016. This is down from 29.6 percent in Q2 and a year ago, and represents the lowest share of income needed to afford median rent nationwide in two years (Q3 2014, 29.2 percent). Among the largest 35 metro areas analyzed by Zillow, rent affordability improved from a year ago in 16 markets, and was essentially unchanged in another two. Rent affordability worsened (the share of income needed to afford an area’s median rent rose) in 17 large markets compared to a year ago.
Improving rental affordability, however small, is likely to have a host of positive impacts on the housing market overall. More-affordable rents may encourage younger workers and recent college graduates that are just starting their careers to move into apartments of their own and out of their parents’ basements, and/or into more personal spaces with fewer roommates needed to split costs. For older renters, less money sent to their landlords each month may make it easier to save for a down payment, easing the transition from renting to homeownership.
But make no mistake – despite recent improvements, affording the rent in America remains challenging for many, especially relative to historic norms. In the pre-bubble years between 1985 and 2000, the average share of income needed to afford the typical rental home in the U.S. was 25.8 percent. Most housing advisors recommend spending no more than 30 percent of income on housing costs, and at 29.3 percent for the typical American renting the typical home, that’s uncomfortably close for many.
And that’s just the national median. In 16 of the country’s 35 largest markets, the share of income needed to afford rent is already above the 30 percent threshold. The share of income needed to afford median rent is more than 40 percent in the most unaffordable rental markets of Los Angeles (48.1 percent), San Francisco (44.4 percent), Miami (43.9 percent), San Diego (42 percent) and New York (40.7 percent).
Compared to historic averages, rent affordability is currently worse than prior generations in 33 of the 35 largest markets, improving only in Sacramento (from 31.8 percent historically to 31.2 percent currently) and Pittsburgh (from 28.4 percent to 23.5 percent). Rent affordability has worsened by more than 10 percentage points in five large markets: Miami (to 43.9 percent from 28.5 percent), New York (to 40.7 percent from 26.2 percent), San Jose (to 39.9 percent from 26 percent), San Francisco (to 44.4 percent from 30.7 percent) and Los Angeles (to 48.1 percent from 36.2 percent).
And finally, compared to buying a home and paying a mortgage, renting is currently very unaffordable. Nationwide, the share of income needed to afford the mortgage on a typical U.S. home (assuming a 20 percent down payment and prevailing mortgage rates as reported by Freddie Mac) was 14.2 percent in Q3, roughly unchanged from Q2 and down from 14.5 percent in Q3 2015. Historically, the average share of income needed to afford the typical mortgage payment in the U.S. was 21 percent. Mortgage affordability is currently better than or unchanged from historic norms in almost all of the nation’s 35 largest markets except two – Los Angeles (38.3 percent currently, from 35.2 percent historically) and San Jose (to 38.4 percent from 36 percent historically).
There are two main reasons why buying a home is so much more affordable than renting. First, home values in general fell dramatically during the recession, and in most areas remain below the peaks reached prior to the housing bust. Rents, on the other hand, never really fell during the housing bust and instead largely kept chugging upward. The second reason is very low mortgage interest rates, which are currently hovering near record lows below 4 percent for a standard, 30-year, fixed-rate loan. Low mortgage rates help keep monthly housing costs low and homes themselves more affordable, even as home values themselves rise. Nationwide, mortgage interest rates will need to rise to more than 6 percent before buying a home becomes less affordable than it was historically, meaning home values have a lot of headroom to grow before mortgage affordability becomes a widespread, national concern.