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Investments / Lending

Renting keeps middle class from buying

Affordability is a vicious cycle

May 2, 2014
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A story from CBS San Francisco this week quoted the CEO of HomeFirst, a homeless advocacy group, on the cost of renting in the area. “Right now to afford an apartment in San Jose, you have to make more than $30 an hour. It’s stunning the gap between what people can afford and what is real," Jenny Niklaus said.

That figure — $30 an hour — translates to an annual salary of $62,400, which in San Jose apparently only gets you an apartment (Trulia lists the median home sales price in San Jose at $628,000). Admittedly, San Jose is in one of the most expensive housing markets in the country, but it is an indicator of a bigger trend of unaffordable rent prices, which should concern the housing industry. According to a Moody's Investor Services survey in March, apartment prices are 6.4% above their pre-financial crisis peak, which means that people are spending more on rent, and less on saving for a house.

The dream of homeownership in this country has always been tied to the middle class. But the number of Americans who define themselves as middle class has declined sharply in recent years, from 53% in 2008 to just 44% in 2014, according to the PEW Research Center. More disturbingly, that's almost the same percent as those who define themselves as lower to lower-middle class, which sits at an historic 40%.

What does this mean to a housing economy that is fueled by the middle-class aspiration to buy a house?

In the Social Security Administration's report on wage statistics for 2012, 53.2% of Americans made less than $30,000 a year. That kind of annual salary affords about $700 a month for housing (using 28% of income) — before taxes.

This calculation doesn't take into account multiple wage-earners residing in the same household, which obviously increases buying power, but the Census Bureau includes that in its national median household income number, which was $51,000 in 2012. 

Using 28% of income for housing would give the median household $1,190 to spend every month on housing, before taxes. Is that enough? According to data compiled by Apartments.com on the top 100 most-searched rental markets in the fourth quarter of 2013, less popular cities feature rents in this range, from an average rent of $966 for a one bedroom in Atlanta, to the average rent of a three bedroom in Cincinnati for $938. However, "Many popular locations, including New York, Los Angeles, Chicago, Philadelphia, Boston, San Francisco and Washington, D.C., do not even have studio apartments available for an average rent of less than $1,000/month." 

Of course, being able to pay rent is just a start. Potential homebuyers need to have enough of a margin to save money for a downpayment, and higher rents can squeeze out paying off debt to qualify for a mortgage.

In an environment of rising rents — what Shaun Donovan, the Secretary of Housing and Urban Development called "the worst rental affordability crisis this country has ever known" — buying a home is going to stay out of reach for too many people.

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