Despite an increase in theoretical confidence among potential first time home buyers, low supply and high demand in the low-mid tier of both the housing and rental markets of many US metro areas has created a triple threat to many renters looking to own, according to trends tracked by Zillow Data. While reinforcing the traditional wisdom of buying over renting, these same three factors combine to create serious obstructions to eventual ownership for low and middle income renters. However, hybrid real estate brokerages and recently introduced conforming mortgages with low down payments can help renters looking to buy.
1. Decreasing Inventory in Low to Mid Tier Housing Driving Prices Up
Mortgage rates are lower and relaxed guidelines from Freddy Mac and Fannie Mae have led to an increase in conforming loans with less than 20% downpayment according to The Fiscal Times. These loans are particularly good for middle and lower tier buyers, but sale inventory at these prices is down 10.4% overall between 1Q15 and 1Q16 in the US, with those percentages varying widely between major metro areas. For example, take a look at New York, Chicago, Los Angeles, and San Francisco:
While New York has actually added mid tier offerings to the sales market, all 4 cities have tight inventory of starter homes, resulting in listing moving at lightning speeds and an overall increase in price (with only New York having a slight decrease in the median price of low tier homes):
Though prices have increased across the board in most areas, low and mid tier buyers also have comparatively fewer choices. And it’s not solely for major metropolitan areas – while certainly the most visible, NYC luxury apartment rentals and other new construction high rises in dense urban centers are not the only reason mid – low tier sale inventory hasn’t kept pace with demand. In US cities hit particularly hard by the housing crisis, particularly the Southwest, investors purchased single family homes at steep discounts to convert to rental units, keeping starter homes out of circulation, as well.
2. Scarcity and Price Increase of Mid to Low Tier Rental Inventory
Low to mid tier rentals in major cities have followed the same pattern of scarcity and price increase. Current renters hoping to scale back to save for a downpayment may find they’ll pay more, even for smaller apartments in less appealing areas, then if they simply stay where they are. According to Zillow, a renter in Los Angeles who has been in the same apartment since 2011 can find that the median rent on a bottom tier unit in 2016 is almost equal to the median top tier rent 5 years ago, a difference of only $88.
Further north in San Francisco, bottom tier rent nearly doubled in the same time period, from $1,236 to $2,456. Available data (which is not separated into tiers), shows that from December 2011 to August 2016, the average median price for an NYC apartment for rent increased by comparably low 31.12%. Chicago’s situation is less extreme, with an increase of “only” 23.13%.
3. Mid and Low Tier Wage Increases Trailing Home Prices
According to RealtyTrac, in the last quarter of 2012, the median year over year home price pulled drastically ahead of and has outpaced median wage increases in the same period ever since, driving up the percentage of monthly income Americans can expect to spend on housing. Between 4Q12, when the percentage of income spent on mortgage payments was at its lowest, and 2Q15 (the most recent available data), lowest tier home buyers nationwide have seen a higher percentage increase (4%) than those at the top (1.5%), and the percentage of income bottom tier buyers can now expect to spend (22.7%) is nearly twice that of top tier (11.5%).
Frustratingly for those renters without the savings for a traditional down payment, the average percentage of income spent on monthly rent for the lowest tiers in Chicago, Los Angeles, and San Francisco also far outstrips even the highest percentage of mortgage payments on comparable units (only total median rental data is available for New York):
The Implications and Solution
To pull all of this data together in a single example, a median low tier renter in Los Angeles spending 90.8% of their income on $2,029 / month rent would have to save every cent of the remaining $205.58 for almost 30 years to afford the 20% downpayment on a starter home in the area currently valued at $369,000.
A less drastic example would be the mid tier Chicago renter, but at a median rent of $1,648 and monthly income of $5,265.18, saving the recommended 10% of their income would still take over six years to reach the $38,760.00 for a down payment. With home prices and rent forecasted to continue their upward trajectory, the mid tier renter’s home ownership aspirations are still a moving target, even in a market like Chicago where negative equity from the recession remains high.
But all is not hopeless. While affordable inventory is limited, it is still out there. The data compiled reports the median prices for each tier, so within the low and mid tiers, there are better deals to be found if a renter utilizes a hybrid real estate agent, who works in both rentals and sales to help develop a long term plan. An agent can give a renter an analysis of their current and projected buying power and can guide renters through a fast moving market to units that will allow them to save more in the short term. When the renter is ready to buy, the relationship will allow the agent to keep an eye out for deals that fall within their criteria.
On the lending front, more conforming mortgages requiring less than 20% down payments, rather than the subprime loans of the housing crisis, have been introduced in the last year and a half. Potential buyers should connect with a qualified mortgage broker to discuss options like the Conventional 97 loan, for loans under $417,000 that require only 3% down payment.
Together, hybrid real estate brokerages and new, safer lending options for buyers who don’t have the traditional 20% deposit can boost mid to low tier renters over the seemingly unscalable wall that stands between them and home ownership.
— Suzan Eraslan is a licensed real estate salesperson with Bohemia Realty Group, helping clients locate those elusive affordable units and achieve their real estate goals.