High home prices have traditionally forced many people to rent for several years before they are able to buy a home. Now, the cost of rent in high-demand areas has risen to the point that buying a home is often cheaper than renting a house or apartment. That shifts the housing market significantly, and is likely to put increased pressure on home prices.
If home prices increase too much, it could become a problem for the first-time homebuyers who provide a key source of housing market growth. Luckily, the recent increase in rental rates is accompanied by gains in builder confidence that should improve housing market inventory substantially in the future. Improved home construction is likely to keep home prices in check despite rising rental costs.
Rents keep growing
Renting is a less efficient use of money than purchasing a home and paying down a mortgage because you do not gain equity in the rental property when you pay a landlord each month. That means renting has historically been a temporary decision for many people. That worked when rents were lower than the average mortgage payment and gave people an opportunity to save money for their eventual home purchase, but it has become less feasible now that rental rates are climbing.
A new study released by Zillow discovered that renting became less affordable in the majority of regions studied. That's indicative of long-term trends that have pushed rents up in some of the most popular areas. Historically, people could anticipate spending about 24 percent of their income on rental payments, on average. During the past year, the average person paid over 30 percent of their income toward rent, and that number topped 40 percent in some of the most in-demand regions.
"Renters paid 30 percent of their income in rent."
Exceptionally high rental rates cause multiple problems for people, because they make it difficult to set aside money that can eventually go to a down payment. If homebuyers have the money to purchase a home right now, they should act, because mortgage payments are exceptionally low, despite recent gains in home prices.
According to Zillow, home mortgages currently require 15.1 percent of homebuyers' income on average each month. That's actually a much lower percentage than the historical average, which was above 21 percent of income. That means that paying off a mortgage is not just a smart move relative to inflated rental rates. The current climate is friendlier to homebuyers than most other times in history, and even consistent increases in home prices can't change that fact.
Home prices are up
It's more expensive to purchase a home now than it was a few years ago because of home price appreciation driven by relatively low inventory, but that doesn't mean that homes are inherently out of most people's reach. In fact, the majority of new and existing homes are affordable to someone who makes the median salary in the U.S., according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index.
"Builder confidence should boost construction."
The fact that homes remain affordable despite price increases should give new homebuyers confidence that they will be able to buy the home they desire, and the situation is likely to improve even further for buyers. Builders are more confident today than they have been in close to 10 years, which indicates confidence that the housing market recovery will continue and bring an increase in home construction. Builders' impressions of traffic from potential homebuyers factor into confidence estimates, and there are indications that buyers are back in the market and well-equipped to handle the burden of homeownership and mortgage payments.
Defaults are down
Credit reporting agency TransUnion revealed that mortgage defaults have fallen to their lowest level since before the recession, and now hover at around 2.95 percent. This is excellent news for the housing market, as it is likely to encourage more construction. But it doesn't necessarily mean that it will be easy for many buyers to purchase a home. In fact, this fall in defaults may cause many lenders to retain tight lending requirements.
Strict mortgage qualification requirements have probably contributed to the fall in delinquencies, but that doesn't mean that everyone who gets shut out of the market by traditional lenders would be a risky loan recipient.
Alternative loans from Impac Mortgage Corp. Retail could help many Americans who do not qualify for a traditional loan take part in the housing market's resurgence. Impac Mortgage Corp. retail has a broad suite of loan products and years of industry experience that allow them to help borrowers navigate the loan application process and find a financing option that works for their specific situation. The housing market's current strength and the alarmingly high rental rates in many parts of the country mean that buyers who purchase a home now using a loan from Impac will reap the financial rewards far into the future.