Buyers beware, renting makes more financial sense
Buy or rent? In California, the answer is almost too easy — rent.
It’s more affordable to rent a three-bedroom house than buy a comparable home throughout much of the state, from Humboldt County in Northern California to San Diego in Southern California, according to ATTOM Data Solutions.
Only two communities — Kings County (Hanford-Lemoore) in the Central Valley and Siskiyou County near the Oregon border– were better for buyers than renters, but the margin was slim.
The average Kings County resident would need 43.6% of his monthly income to rent a three-bedroom home compared to 42.7% to purchase. The difference is even smaller in Siskiyou County, with 38.1% of income for rent compared to 37.6% to purchase.
The disparity between buying and renting is much greater in other regions of the state, especially the Bay Area and Southern California. For example, renting will demand 45% of the average San Francisco resident’s income vs. 112% to purchase. In Los Angeles, 51% of income to rent vs. 86% to own. (Click below for an interactive map.)
Of course, renting is far from affordable in most cities in California, but it makes more fiscal sense than saving for a down payment and then struggling with the hefty monthly mortgage.
Several communities in California are among the most expensive for renters in the nation, including first-place Santa Cruz, where the average renter spend 82% of her income on housing. Renters in San Benito, Sonoma and Marin counties all spend more than 60% of their income on rent compared to the national average of 38%.
3 of 5 U.S. cities are renter markets
Californians dreaming about buying a home are not alone with their disappointment in the buy-vs.-rent debate, 59% of cities nationwide are renter markets. In fact, renting makes more fiscal sense in 18 of the largest counties in the nation, and 37 of the largest 40 counties, according to ATTOM Data Solutions.
Basically, home prices are outpacing wage gains — and easily exceeding rent increases.
“With rental affordability outpacing home affordability in the majority of U.S. housing markets, and home prices rising faster than rental rates, the American dream of owning a home may be just that — a dream,” says Jennifer von Pohlmann, director of content and public relations at ATTOM Data Solutions. “With home price appreciation increasing annually at an average of 6.7 percent in those counties analyzed for this report and rental rates increasing an average of 3.5 percent, coupled with the fact that home prices are outpacing wages in 80 percent of the counties, renting a home is clearly becoming the more attractive option in this volatile housing market.”
Bigger down payment will make a difference
ATTOM Data Solutions crunched the data based on the average rent and price for a three-bedroom home compared to the average weekly wage for each city. So, the data compares the percentage of income needed to buy or rent in a specific city.
Also, buying a home was based on a 3% down payment. Homebuyers with a larger down payment would enjoy a smaller monthly mortgage and spend less of their income on housing. Plus, home ownership has some possible tax benefits, which could make buying a better option, though tax credits were diminished with the the latest tax reform in high-cost states like California.
ATTOM Data collected data from the U.S. Department of Housing and Urban Development, wage data form the Bureau of Labor Statistics along with public record sales deeds.
Photo of “Buy or Rent” on beach by Song About Summer/Shutterstock
CoreLogic: Home sales tumble 12%, price gains slow in November
California home sales declined in November compared to October and a year earlier, the latest evidence that the once-booming housing market is losing some strength.
The state had an estimated 33,654 homes sold in November, off 12.2% compared to October and 12.1% in November 2017, according to industry tracker CoreLogic.
Entry-level homes were the hardest hit, with sales of homes below $500,000 falling 16.9% in November compared to a year ago. Homes above the $500,000 level were off 8.4% from a year ago. Even $1 million-plus home sales struggled in November, tumbling 9.6% compared to a year ago.
Affordability and higher interest rates were the likely cause for the slowdown. Plus, more would-be homebuyers are taking a wait-and-see approach as home price increases slow and more homes are placed on the market.
CoreLogic reports the median-home home price was $490,000 in November, a modest 1.0% increase from October and up 4.3% since November 2017. The annual median-home price increase was the second-lowest in 2018, just slightly better than the 4.1% increase in September.
About the author
Ron Trujillo, an award-winning business journalist-turned-public relations executive, is the editor-owner of CalHomeNews and can be reached at firstname.lastname@example.org.
What 3 CA cities had the largest rent increases vs. pay gains?
Three cities in California reported the fastest-rising rents from 2014 to 2017 in the nation, creating a financial hardship for many renters, according to SmartAsset.
The SmartAsset study compared the fair market rent to median household income in 2014 to the same data in 2017, and then determined the economic impact based on the percentage of a renters’ monthly wages.
Long Beach, often considered a more affordable renters market for those working in downtown Los Angeles, had the third-largest increase in rent vs. income from 2014 to 2017. Rent climbed from $1,580 to $2,110 during the three-year period. Even with pay gains, the percentage of household income for rent increased from 34.8% in 2014 to 41.8% in 2017. Long Beach’s 7.0 percentage point increase was behind only Detroit at 9.8 points and New Orleans’ 9.1 points.
Sacramento had the fifth-largest increase in the nation, at 4.7%, while San Diego’s finished in 10th place at 2.0 percentage points.
Many renters in Long Beach, Sacramento and San Diego enjoyed good pay gains during the three-year period, but their rent increases exceeded their income.
California’s priciest rental markets — San Francisco, San Jose and Los Angeles — escaped the top-20 list of the largest rent increases since the average renter enjoyed bigger pay gains than their rent spikes.
Photo of vintage apartments in Los Angeles by Natalie Macheda/Shutterstock
Higher rates, fewer buyers and new-home sales take a huge hit
How much do interest rates affect homebuyers? A lot.
In fact, for every quarter-point increase, about 1 million consumers are priced out of the market nationwide, according to the National Association of Home Builders. The figure is based on a new-home sale price of $355,000, almost $250,000 less than the overall median-home price in California.
If the state accounts for about one of every eight Americans — or roughly 12.5% — an estimated 125,000 families are priced out of the market in California with a quarter-point increase in mortgage rates. Of course, the figure is slightly higher, since California has higher-priced homes and likely more mortgage-rate sensitive consumers.
For example, a homebuyer would need to earn at least $110,000 to qualify for a mortgage for a $597,000 house with a 20% down payment and an interest rate of 3.5%. The annual income requirement increases to $120,000 at 4.5% and $140,000 at 5.5%, according to the California Association of Realtors.
Although lower in recent weeks, higher mortgage rates compared to a year ago are already hurting the new-home market in the state, according to John Burns Real Estate Consulting. New-home sales plummeted 49% in Southern California and 40% in Northern California in December, compared to a year ago.
National home builders, including Lennar and Toll Brothers, have also reported declines in home sales and traffic in their model homes in new subdivisions.
It’s worth noting that new-home sales started declining about a year before the last housing market crash in 2008.