Are We Creating a Generation of Renters?

  • Renters can expect to spend 30 percent of their income on rent, while buyers can expect to spend 15 percent of their monthly income on a monthly mortgage payment.
  • Rental affordability worsened year-over-year in 28 of the 35 largest metro areas covered by Zillow.
  • Denver, Los Angeles, San Francisco, San Jose, and San Diego are unaffordable for both renters and buyers.

Sourced through from:

Although buying is currently more affordable than renting, rents continue to rise in major metropolitan areas. This factor fully benefits apartment Real Estate Investment Trusts (also known as REITs). However, will this trend continue to the point where it is worth keeping, or buying apartment REITs, whose valuation metrics have been above historic measures?

Zillow has recently publicized that mortgage affordability has improved in comparison with the period between 1985 and 2000, and rent affordability has worsened. Although this is the best time to purchase homes, and stop paying rent, people are not buying. Will it ever change? In the mid-term, it does not seem like it, which should result in apartment REITs continuing to fare well over the next few years.  

A few factors help to explain it:  

· Mortgage rates remain at historically low levels; however, long-term trends should modify this resulting in a gradual worsening of mortgage affordability to historic averages. Of course this will make it more difficult for people to purchase homes.

· Down payments are a confirmed obstacle for many potential homebuyers. Since renters are paying upwards of thirty percent of their income to rent payments, it is less likely that they are saving money to purchase homes. This trend directly affects their ability to afford the down payment.

· Regarding the millennials, they need to separate a significant portion of their income to pay school loans.

· Renters also need to consider the cost of healthcare, and given the choice between that or homeownership, the safer bet is healthcare coverage. 

In conclusion, renters are often trapped in a vicious cycle. Since they pay out a significant portion of their income in rents, it makes it far less likely to be able to afford purchasing homes. Apartment REITs have significantly benefited from this trend, and likely will continue to. 

Download our U.S. REIT Report

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

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