A slow housing recovery, complicated by falling prices and stricter lending, along with a lackluster improvement in the jobs market, has focused new attention on market conditions for renters. If you’re deciding whether to sign that lease renewal or to buy a home, consider the following.
According to researchers at the Joint Center for Housing Studies of Harvard University, rentals play a significant role in housing by providing “affordable homes on flexible terms.” But data show that lower transaction costs and freedom from property maintenance aren’t enough to make the rental market attractive for many.
While changing economic and demographic forces, such as the high risks of homeownership and the maturing of the 81-million-strong Echo Boomer generation, are driving demand for rentals, that demand is also making it more undesirable to rent than to own.
Rising demand for rentals raises prices
During the Great Recession, household formation plummeted. As of Q4 2010, vacancy rates dropped 1.7% and rents increased 2.3%, according to MPF Research. The Joint Center predicts that the number of renter households will increase by 360,000 to 470,000 annually between 2010 and 2020, assuming that home ownership remains at 2010 levels.
Affordability puts more renters into single-family homes
Half of all rentals are in properties of one to four units and are financed through the single-family mortgage market. Thirty-four percent of rentals are single-family homes.
Inventory levels of rentals are declining
The number of new rental units being built has declined since 2005 to about 230,000 units annually, and by 2009, multifamily production was the lowest in more than 50 years at 100,000 units, says the Center. At a historical 8% vacancy rate, and with renter households rising 700,000 annually since 2006, the current surplus of 4 million vacant housing units could be absorbed in about a year.
Mortgage interest rates increase affordability
The same conditions that are creating more renters is also keeping mortgage interest rates near all-time lows. In May 2011, rates were the lowest they’ve been in 2011, and are close to the all-time lows reached in October 2010.
Fewer foreclosures
According to the Mortgage Bankers Association, homes in some stage of foreclosure are about 2 million units.
Federal subsidized housing losing units
Many owners of rent properties are abandoning federal subsidies in favor of seeking market-rate rental prices, resulting in a net loss of over 700,000 units since the mid-1990s. Nearly 12% of low-cost rental stock that existed in 1999 was demolished or uninhabitable by 2009. Because so few newer properties have been added, the average age of rental stock is 38 years. The result is that median rents are higher.
Buy vs. rent ratios tip toward buying
For renters, utilities and rent should require less than 30% of household income. For homebuyers, utilities aside, the median-priced home is affordable with only 13% of household income, assuming 20% down, says the National Association of REALTORS®.
If you’re uncertain whether it’s better to rent or to own, ask your real estate professional for assistance. He or she can help you sort through current rental and purchase options so you can make an informed decision according to your preferences and your local market’s conditions.
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