Why the math on homeownership is not motivating
renters
Diana Olick
| @DianaOlick
08 April 2015 | CNBC.com
Rents are soaring, and mortgage
rates are still historically low, but renters seem less and less inclined to
buy, even when homeownership could save them money fast. How fast? Two years,
according to Zillow, a real estate sales and analytics company.
While the numbers vary market to
market, Zillow found that most homebuyers would be paying less per month to own
a home than to rent after two years. It made its calculation by incorporating
the costs associated with buying and renting, including upfront payments,
closing costs, anticipated monthly rent and mortgage payments, insurance,
taxes, utilities, maintenance and even renovation costs .
Amid the nation's 35 largest
metropolitan housing markets, Dallas-Fort Worth had the lowest break-even
horizon, at 1.2 years. Indianapolis and Detroit were next at 1.3 years. The highest
break-even horizons were in Los Angeles at 5.1 years, Washington, D.C., at 4.2
years and San Diego at 3.8 years.
And yet the math isn't moving
renters.
"If the buy versus rent
decision were about simple math, we'd likely have millions more homebuyers in
the market, because the equation is tilted heavily in favor of buying,"
said Stan Humphries, chief economist at Zillow. "But no matter what the
numbers say, buying a home is a huge commitment. Every day, Americans make
decisions to buy or rent based on any number of personal dynamics, including
preference, flexibility needs, family factors and, yes, financial
considerations."
Another survey done in March by
mortgage giant Fannie Mae found respondents less inclined than ever to buy a
home if they were to move. This may be because people also feel less confident
that their financial situation will improve. This dovetails with new numbers
from the U.S. Labor Department showing still slow income growth.
Younger renters, who may in fact
want to buy, are struggling to save for a down payment, given their high rents
and high level of student loan debt. Of renters surveyed by Zillow, 16 percent
said they couldn't qualify for a loan and 13 percent said they didn't have
enough for the down payment.
Mortgage credit availability is
tight, according to most industry surveys, but some argue that the numbers
don't paint an accurate picture. Today's borrowers, they claim, may have higher
credit scores, but only because borrowers with lower credit scores generally
don't have the means to purchase a home, so they're not even applying. That
takes them out of the credit mix.
This also shows up in demand for
both new and existing homes—the bulk of which is on the higher end. Home
builders say that's where their business is, and that is why they're not
building as many cheaper, entry-level homes as they have in the past. On the
existing home side, still very tight inventory paints a similar picture. There
are so few homes for sale that lower-end owners who may want to move up are not
listing, for fear they won't find somewhere else to live, somewhere they can
afford.
"It's still a seller's
market," said Jonathan Smoke, chief economist at Realtor.com. "Supply
is not keeping pace with surging demand. We expect rising prices to persuade
those who may be on the fence about listing their homes to do so in the coming
months, leading to closer parity between supply and demand."
Home prices, however, will be the
key driver. Fast, investor-fueled home price appreciation in 2013 threw a wet
blanket on sales in 2014. That's because investors priced themselves out, and
regular owner-occupant buyers couldn't afford the new market. As price gains
eased toward the end of last year, the hope was that buyers would return; the
trouble now is, again, still-short supply buoying prices.
The number of homes for sale grew by
just 2 percent from February to March, according to Realtor.com, far below
normal spring growth. Fence-sitting sellers may be more inclined to list, but
only if they know they can afford the move-up home and only if they feel
certain the investment is the right move. If their confidence in both the
broader economy and their own personal wealth potential is anything like that
of renters, they may continue to ride the fence.
