October 21, 2016

Why Renters Can’t Make the Move

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Why Renters Can’t Make the Move

Spiking rents are making it hard for would-be buyers to save for down payments.

In August, rents spiked 3.6 percent over the same time a year earlier, the fastest pace since 2008. As rental vacancy rates fall across most parts of the country and more jobs are created, they will continue to jump further. This trend is both good news and bad news.

Naturally, people collecting rents are thrilled with the gains they’re seeing. Both large apartment investors and mom-and-pop landlords are enjoying the best conditions they’ve seen in years. As REALTORS®, many of you are among the biggest beneficiaries; our surveys indicate about a third of you own investment property.

Of course, renters don’t like forking over more money to be tenants. That’s why, when rents rise strongly, it creates demand for home buying. But that isn’t happening this time. In fact, the share of first-time buyers, who typically lead the move from renting to owning, continues to hover at near 30-year lows.

Rising rents are making it difficult for potential first-time buyers to become owners, especially since rent increases are outpacing wage gains. That means more of a tenant’s income is being eaten up in rent, making it harder to save for a down payment.

The weak wage growth is a consequence of decade-long subpar economic growth. Historically, U.S. gross domestic product grows at a 3 percent annual rate. But since the recession, growth has been averaging only 2.2 percent. A decrease of 0.8 percentage points might sound small but, in an economy of $18 trillion, it has a significant, cumulative impact.

Meanwhile, home prices are rising, in large part because builders aren’t adding new homes for sale at a rate matching demand. Only 5 million single-family and apartment homes have been built in the last five years, even though 12.5 million jobs have been added during that period.

The lag in construction represents good and bad news. It’s helping to keep rents and home prices up, but it’s making home ownership more difficult as tenants struggle to save for the down payment they’ll need to buy an increasingly costly home. While the construction outlook is unclear, until builders contribute to the overall housing stock at a more normal pace, home prices and rents will continue to rise.

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