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The housing market recovery continues, prices are seeing nice steady increases, and we’re telling everyone that it’s a great time to buy again with rates as low as we’ve seen in a long time. But what if they can’t? Maybe they’re renting right now, and are amongst the many who are stuck in the cycle of rising rents.
Our own experience, along with recent research, tells us that most Americans who are renting want to become homeowners. But the numbers coming out of the market right now show that about half of current renters are considered rent-burdened. What does that mean exactly? Well you’ve probably heard that when getting a home loan, the percentage of money you would spend on your monthly housing payment (principal, interest, taxes, and insurance) shouldn’t be more than about 28% of your pre tax income. The same concept applies for renters, but due to the huge rises in rents lately, many renters are being forced to pay more than 30% of their income to rent. And actually, about one quarter of renters are considered “severely cost burdened”, spending more than half their income on rent.
Why are rents so high? Well home ownership is still around the lowest level in decades, and there is high demand for rental properties, with vacancies at all time lows. Construction of new homes and lower cost apartments has still not caught up with current demand. And while incomes are beginning to rise again, they haven’t gone up nearly as fast as rents. Last year the median rental cost nationwide rose a whopping 26% - way more than increases in income.
One positive side of this situation is that if you’re an investor in rental properties, conditions have never been better. Even mom and pop landlords are reaping huge benefits, as the rent you can get for many properties is often higher than the cost to own them. Also, higher rents can help drive home sales, making buying a home more attractive to more people. If some may have been reluctant to enter into home ownership after the housing crisis, it becomes much more desirable when they realize it’s actually far more affordable long term than renting! The downside, obviously, is that some of these current renters may be hard pressed to save as much as they need for a down payment.
There was a proposal recently for a bill that would give renters a huge federal tax break - allowing them to deduct what they pay in rent from their taxes, similar to what homeowners are allowed to do for the amount they pay in mortgage interest and property taxes. This would be a big shift, and could certainly mean more savings for renters, but some argue that there are already renters’ credits in many states, and that a bill like this could hurt home buying by making renting more affordable.
Personally, we think this bill is unlikely to go through in any case, and the best solution long term is probably an increase in construction of affordable entry level housing and apartment housing, to help ease demand. But what do you think? Are you currently renting? Wondering if you can afford to make your first move to home ownership? Interested in owning a rental property and capitalizing on the current conditions? Talk to us about any of this or other questions you may have!
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