High Rents Putting the Squeeze on Renters

A look at U.S. rental and mortgage affordability.

Seattle—There’s plenty of anecdotal evidence that apartment rents have become less affordable to a sizable slice of the renting population in recent years. A new analysis of U.S. rental and mortgage affordability in the second quarter of 2015 by residential data specialist Zillow quantifies the notion. Less rental affordability in most major metros is, in fact, the case.

Curiously, even though rental affordability worsened over the last year, mortgage affordability—which is relatively high because of low interest rates—stayed essentially the same. Renters in the United States can expect to put 30.2 percent of their monthly income toward rent—the highest percentage ever. Before the real estate bubble burst, U.S. renters could expect to spend about 24.4 percent of their incomes on rent.

By contrast, residential buyers pay an average of 15.1 percent of their income towards mortgage payments, which is still less than what they spent historically. From 1985 through 2000, homeowners spent about 21.3 percent of their monthly income on mortgage payments, noted Zillow.

Naturally, the squeeze is on in some places more than in others. In Denver and four California metros, for example, both renters and buyers can expect to pay more of their income towards either rent or mortgage payments than in pre-bubble years. In San Jose, which is a particularly hot market, renters and buyers are being hit up for 42 percent of their incomes for housing.

For renters, some particularly expensive markets include metro New York at 41.3 percent of income, on average; Miami, at 44.5 percent; and greater Los Angeles at 48.9 percent. These have always been expensive markets, but even so rents historically (1985-2000) have only taken an average of 25.3 percent in New York, 27.5 percent in Miami, and 35.6 percent in LA.

A few major metros are still comparative bargains for renters, in terms of the bite rent takes out of their monthly incomes. The average is 26.8 percent in Washington, D.C., for instance, and (a little) below 25 percent in St. Louis and Pittsburgh.

Interest rates are a factor in the price of for-sale housing, but even if mortgage rates rise as expected, mortgage payments will continue to be relatively affordable, according to Zillow. The company hypothesized that if rates reach 6 percent next year, home buyers can still expect to spend 30 percent or less of their income on mortgage payments in 265 out of 290 (91.4 percent) of the U.S. metros Zillow analyzed.

Rents, on the other hand, are already unaffordable compared to historic norms in 77 percent of metros. As long as wages remain stagnant, that situation isn’t going to improve, because rents are expected to keep rising in most places.

Moreover, the impact of high rents affects many parts of the economy. “Unaffordable rents are making it hard for people to save for a down payment and retirement, and that people whose rent is unaffordable are more likely to skip out on their own healthcare,” noted Zillow chief economist Svenja Gudell. “From an affordability perspective, rents are crazy right now. If you can possibly come up with a down payment, then it’s a good time to buy a home.”