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Why Chicago Renters are Not Buying Homes

by Peter Thomas Ricci

Rising rents, new research shows, are not an incentive to buy a house

Home-Price-March-CoreLogic-distressed-Index

Renters in the Chicagoland metro area are spending substantially more money on their monthly rent than is historically the case.

That was the finding of a new analysis from Zillow on rental affordability in 2015’s first quarter. According to Zillow’s study, renters in Chicagoland typically devote 30.3 percent of their monthly income to rent, up from the historical average (from 1985 to 1999) of 21.8 percent.

This graph examines rental affordability in Chicagoland and other metro areas:

rents-share-of-income-2015

As the graph shows, Chicagoland is not an anomaly, as every large metro area has seen rental affordability fall from its historical averages – and that poses problems for homeownership.

For some time, housing analysts have argued that rising rents would incentivize consumers to buy. The logic went like this: with the cost of rent increasing and interest rates remaining historically low, renters would see that homeownership represents an irresistible deal, and before long, renters would jump on the homeownership bandwagon.

However, as research by Freddie Mac and now Zillow has demonstrated, there’s a problem with that logic. Although homeownership is less costly than renting in today’s low-mortgage-rate climate, consumers must be capable of buying a house in the first place to take advantage of those low rates. And when rents are rising as strongly as they have been, they take a big bite out of the very savings renters would use for a down payment on a house.

Zillow’s research found that renters who spend more than 30 percent of their income on rent – in other words, the majority of renters, as the graph documents – have a median savings rate of zero. Furthermore, 60 percent of renters with high rent burdens could not cover three months of expenses if they lost their main source of income.

“Renting is typically seen as a stepping stone to purchasing a house,” said Zillow Senior Director of Economic Research Svenja Gudell. “Usually, a housing crisis is localized, but this one touches almost every city in the country. Incomes have been flat, and that’s driving a wedge between rents and incomes — it is what’s causing an ever-growing share of income to be allocated to rent payments.”

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