Renting was once considered a temporary transition on the path toward home-ownership. Today, however, leasing has become a long-term prospect for many.
Nearly 40 percent of the U.S. population is renting – the largest renter base seen in half a century.
Renting is no longer reserved for young professionals, either. Millennials make up 56 percent of the renter demographic while Generation X accounts for 29 percent of all renters. Even some baby boomers (12 percent of all renters) put the typical American Dream aside in favor of a mortgage-free lifestyle.
Consider a few of the reasons renters choose to lease longer and forgo home-ownership – at least for the time being.
Rising rent prices and falling interest rates over the last few years solidified home buying as the more cost-effective housing choice. Nationally, paying a mortgage is still much cheaper than renting. As of the third quarter of 2016, buyers typically spent around 14 percent of their income on monthly mortgages, compared to renters who paid 29 percent toward leased housing.
However, saving up for a down payment is no easy feat. Zillow’s Consumer Housing Trends Report reveals the majority of long-term renters make less than $50,000 per year. The median household income of all renters is $37,500 per year compared to buyers’ median household income of $87,500 per year. Take the red-hot Seattle housing market as an example: The median list price is currently a high $595,000. Seattle renters looking to put 20 percent down would need $119,000 upfront, not including closing costs. Pair income limitations with the fact that so many renters allocate large portions of their wages toward rent, student loan payments and credit card debt, and there’s little room left in the budget for savings.
Flexibility and Freedom
Mobility, location and fewer responsibilities are compelling reasons for renting. Some apartments afford a better location and upgraded amenities at a lower monthly cost than buying an equivalent home in the same neighborhood. Plus, renters don’t go through the same hurdles as owners when relocating. A homeowner pursuing a career opportunity in a different city must market, list and sell their property – or lose their largest investment entirely. A leaseholder facing a similar situation might relinquish their security deposit, but the process is far less stressful and time consuming. Finally, many prefer to let landlords handle home maintenance and expenses, especially renters who travel frequently.
Fewer Homes on the Market
Despite budgetary restrictions among many lessees, 13.8 percent of renters report they have the income and credit score to buy a home now. So why do so many continue to pay their landlord’s mortgage instead of investing in a property they could, ideally, realize profits from down the road? One big reason is the lack of for-sale inventory, which continues to wane nationwide. This holds true particularly in areas with strong job growth and higher median incomes. San Jose, San Francisco and San Diego ranked as the top 3 housing markets with the most competitive renters who are financially stable. However, these markets also have skyrocketing housing prices and precipitous drops in home supply. Even the most qualified renters are stuck with a limited amount of for-sale options that may not satisfy their needs.
The number of new homeowners dropped by 22,000 in 2016 compared to the year prior, and there’s no telling if suspected interest rate hikes may further deter first-time home buyers.
Further, although mortgages largely remain more affordable than rents, median U.S. rent growth is slowing. Between November and December of 2016, rents remained flat, up just 1.5 percent from the year prior. Meanwhile, home values lifted 6.8 percent annually.
Despite the motivations to rent, many renters still weigh the benefits of home-ownership earnestly. Over half of all renters in the market for a new lease (58 percent) consider buying instead, with 19 percent seriously debating a home purchase while searching for new rentals.