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Mortgage Payments are More Affordable Than Ever With Rents at an All-Time High

mixed-numbersRents are at an all-time high for single-family homes, but monthly mortgage payments are more affordable now than they were before the housing bust, according to Zillow's affordability report for the second quarter of 2015.

Zillow found that renters nationwide can expect to spend 30.2 percent of their monthly income on rents in Q2 2015. In markets where single-family rental housing is in high demand, like Los Angeles, San Jose, Miami, and San Francisco, renters can expect to spend more than 40 percent of their monthly income on the rent—more than 10 percent higher than the national average for Q2.

Rent affordability worsened in 28 of the nation's 35 largest metros in the last year, according to Zillow chief economist Svenja Gudell. Rent affordability stayed the same in three metros and improved in just four of those 35 (Pittsburgh, Chicago, Minneapolis, and New York).

Conversely, homebuyers can expect to spend about 15.1 percent of their monthly income on a mortgage payment, according to Zillow's research. In the years immediately prior to the crisis in 2008, those who own a home could expect to spend about 21.3 percent of their monthly income on a mortgage payment. Purchase affordability improved in 14 of the top 35 metros in the last year, according to Gudell.

Why do monthly mortgage payments cost so much less than rents these days? According to Gudell, the answer lies with low mortgage rates. Mortgage rates could be as high as 6 percent (they are currently below 4 percent) and buyers in 265 out of 290 metros analyzed by Zillow could still expect to put less than 30 percent of their monthly income toward paying the mortgage, according to Zillow.

"(Rates) are currently hovering near all-time lows," Gudell said. "This helps keep monthly mortgage payments low. Renters can’t take advantage of mortgage financing each month. Additionally, while home values dropped steeply during the most recent recession and remain below their pre-recession peaks in most areas, rents have been on a slow, steady, upward climb for much of the past decade. Finally, income itself—while showing signs of picking up in recent months—isn’t growing sufficiently to keep pace with growth in rents and is growing far more slowly than it was prior to the recession."

With consumers spending an average of twice as much of their monthly income on rents as they are on mortgage payments, now is a good time to buy a home. High rents make it difficult to save for a down payment, however.

"There are good reasons to rent temporarily—when you move to a new city, for example—but from an affordability perspective, rents are crazy right now," Gudell said. "If you can possibly come up with a down payment, then it’s a good time to buy a home and start putting your money toward a mortgage."

Not only are some renters not able to save for a down payment on a mortgage, but some who are overdrawn are even cutting back on healthcare, according to Zillow.

"Looking forward, the picture doesn’t look bright for renters," Gudell said. "Rents will likely keep rising at roughly their current pace for at least the next few years, which will lead to a continued affordability crunch unless wage growth significantly improves."

Click here for more on Zillow's research.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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