Most renters are putting about 30 percent of their monthly income toward their rental payment, which makes saving for a 10 or 20 percent down payment difficult, a new Zillow report showed.
This essentially put those would-be homebuyers in a catch-22—they cannot afford a down payment because they are putting so much money toward rent, and the reason they are putting so much money toward rent is they can't afford a down payment.
"In general, paying a mortgage is more affordable than renting, and has been for some time. Unfortunately, many current renters aren't able to realize the savings that come with homeownership because as home values and rents keep rising, it's getting increasingly difficult to clear the down payment hurdle," said Dr. Svenja Gudell, Zillow's Chief Economist.
This conflict forces first-time buyers and millennials to pursue other options when looking to purchase a home, like help from family or friends. The report showed that in 2014, 13 percent of home purchases were bought using a loan or gift from friends or family for the down payment.
"It's not uncommon for a 20 percent down payment on even a modest home to represent savings of $50,000 or more in some areas."
Svenja Gudell, Chief Economist, Zillow
Affordability of rentals worsened in the last year in 28 of the 35 largest metros over the past year, while mortgage affordability worsened in 18 of them, In 34 of the largest 35 metros, rental affordability is worse than the historical average.
"It's not uncommon for a 20 percent down payment on even a modest home to represent savings of $50,000 or more in some areas," Dr. Gudell said. "And that number itself is a moving target, rising as home values escalate and harder to achieve as more money goes to landlords and less goes to savings. Using a smaller down payment is an option, but often comes with the added cost of mortgage insurance. Knowing this, it's no wonder that many current renters are waiting longer to buy a home and are turning to alternate sources, including friends and family, to help them scrape together a down payment."
Click here to view the full report.