The rent is too damn high, according to a Zillow study commissioned by the New York Times. The numbers will likely make you sick.
Let’s talk terminology for a moment. “Affordability” has taken on great gravitas in today’s economy-obsessed culture, but what does it really mean? In its most extreme context, one can consider affordability in terms of life and death, as in: can you afford to take that leap? In other words, will you be able to accomplish that leap without killing yourself in the process? This is precisely what we mean when we speak of affordable housing. Can you afford the rent? Are you able to make your monthly payment without suffering financial death?
Based on the standard rule that rent ought not exceed 30% of one’s monthly gross income, the U.S. is shaping up to be a financial killing field.
Check out this chart from Zillow showing the rental affordability in the major U.S. metro regions. Note that California metros are among the worst offenders.
In 90 U.S. cities, the median rent was greater than 30% of the median gross income. Half of all renters are now spending in excess of 30% of their income on rent. And the problem is getting worse.
And the rapid increase in rental demand is tightening the squeeze. The U.S. added a net 6.2 million tenants from 2007 to 2013, while only 208,000 homeowners were created, according to Zillow. These figures are particularly exceptional in light of declining household formations. Thus, the problem of demand will only compound when (if!) Generation Y finally branch off on their own and enter the rental market.
What’s to be done? The obvious answer is to increase supply. The market is supposed to correct itself in the face of overwhelming demand, right? Not so, according to Jaime Ross, President of the Florida Housing Coalition:
“Increasing the supply is not going to increase the number of affordable units; that is a complete and utter fallacy [. . .] the market has never corrected itself and it’s only getting worse.”
That’s true in California, as well. Multi-family housing starts have risen steadily since 2012. Yet, vacancy rates continue to decline and rents maintain their steady inflation.
A short-term correction is coming in the near future. Today’s inflated rents are, to some extent, due to the inflated prices of 2013. As we know, investors bought big in 2013, many placing their bets on multi-family properties in addition to single family residences (SFRs). Part of the rent inflation we see now is a hangover from last year’s buying frenzy, with investors attempting to realize a healthy return on investment (ROI).
A fix for the systemic social problem is more elusive. Real estate is appreciating faster than the rate of inflation and since shelter is a necessity, it’s proving to be an excellent opportunity for exploiting the middle class. Rather than be homeless, they’ll just devote a larger share of their income to paying for shelter.
So while the rabble sharpen their axes, use this handy buy/rent comparison analysis we’ve created to illustrate the best option for your clients.
I’m a broker, buyer, seller and landlord with 11 years of actual experience and firsthand knowledge of the subject matter. I’ve personally bought, sold or leased over 300 single family residences.
First Tuesday should STOP being a media outlet for the left. The subject matter is real estate and not political commentary. Please stick to the subject matter and the facts.
The price for housing (rent or purchase) is driven by supply and demand. That supply and demand is being manipulated by your government (federal, state, county, city, etc.). The Federal Reserve is the worst offender with its current policy of low interest rates that have artificially driven up demand and driven down supply. This is very simple economics 101.
Short term, we’re stuck with the current government’s policy of expanding its role in our everyday lives (side note: government can’t expand with reducing the individual’s freedom and liberty. This is a FACT!). Long term, will depend on whether voters embrace candidates who favor large government or small government. It’s just that simple.
Higher rents do not necessarily equate to higher profits for landlords. Many landlords in Southern California are faced with falling profit margins. The biggest problem is government all levels raising fees, taxes, permits, inspections, and registration fees both direct and indirect. All one has to is look at your utility bills and compare them to last year, water, trash and sanitation fees are to name a few. Many of these costs are absorbed by the landlord as they have been unable to pass them on to tenants. Wait till rent statements look like a property tax bill! Why did this or that few or line item double? That might be helpful as tenants realize that rising rents are not just because landlords want to make more money. Owning rental property is a risky business, just look at the things included in rental agreements these days in California – Megan’s Law, Prop 65, lead based paint, mold, pest control notices . . . the list goes on and on. If you want to be even more regulated buy a property in a rent controlled area (San Francisco, Santa Monica, Berkeley, San Jose, Palm Springs). Want more info check out how many bills on Sacramento are related to regulation of landlord rights, not to mention many other industries.
Spot on! as the English would say. The fix that the gov. continues to do is not a fix’s at all. We need gov. out of business. Gov. roll in this is best as give incentives to “small business” to invest. Not to pass laws and regulations to try and fix this. Never worked before and never will. For Gov. to work with giant Business will not work either…all this does to if the pockets of our public officials and gives our tax $$ away.
How can you state that increasing supply will not solve the problem of too many renters? You either must stop illegal immigration or build more homes. Our economy is based upon an ever increasing population, so when the criminals in gov create a real estate bubble that bursts causing loans to stop then our debt based economy with a 10 to 1 fractional reserve stops the creation of money which in turn stops building homes. Now it is about catch up.