NEW YORK (MainStreet) Renting is becoming unaffordable in many metropolitan cities, a new report reveals.
According to Zillow, renting is more expensive than buying in 94 of the country's 100 biggest metropolitan areas.
The report suggests the rental market didn't see a precipitous drop in prices stemming from the financial crisis, as illustrated in the housing market, which explains the slow and steady upward trend in rents. Plus, the study says consumers spent an average of 29.5% of their income on rent, compared to 15.3% for home buyers with mortgages.
Home buying affordability stems from the low interest environment, which isn't expected to last, especially as the Federal Reserve scales back its bond stimulus, known as quantitative easing.
On Thursday, Freddie Mac said the average rate on a 30-year fixed mortgage held steady at 4.10%, compared to 4.51% during the same time last year.
Rising rents could prove to be a vicious cycle for the real estate market.
"As rents keep rising, along with interest rates and home values, saving for a down payment and attaining homeownership becomes that much more difficult for millions of current renters, particularly millennial renters already saddled with uncertain job prospects and enormous student debt," said Zillow Chief Economist Dr. Stan Humphries. "In order to combat this phenomenon, wages need to grow more quickly than they are, particularly for renters, and growth in home values will need to slow."
Wages aren't showing robust growth, and rising inflation is making matters worse. The Bureau of Labor Statistics said that while average hourly wages grew 2% year-over-year in July, the consumer price index also grew 2% during the same period.
Some consumers have been shut out of the mortgage market, stemming from tightened credit spigots as a result of the 2008 recession.
As MainStreet reported, lending standards have eased slightly, but banks still remain prudent.
The uptick in cash buyers as of late is also helping to push up rents. "Cash buyers are either investors or retiring baby boomers who are downsizing," says Dani Babb, Broker/President of The Babb Group Real Estate, Inc.
RealtyTrac says 38% of all sales during second quarter were cash purchases, down from 42% during first quarter, which was the highest level in three years.
"Investors with less cash should help ease rental increases," Babb adds. "But investors may rely on home equity lines of credit as a source for more cash, so it's unclear how it will play out."
Cash buyers have more flexibility, as they don't have to rely on a bank's rigorous credit and application process that mortgage seeking buyers deal with.
- Written by Scott Gamm for MainStreet. Gamm is author of MORE MONEY, PLEASE.