Though it may be hard to believe for those of us working and living in the Los Angeles real estate market, buying is still more affordable than renting in almost every major U.S. city. Those numbers are even technically true for the greater L.A. area where it takes a nationwide high 48.8% of monthly income to cover the rent and 39.9% to pay for a mortgage. These numbers are a bit misleading though, since Zillow estimates the local median home price as $547,900, which might buy you a studio condo in most neighborhoods buyers are interested in.
However, the biggest problem for most first time buyers trying to get a foothold on the property ladder isn’t making the monthly mortgage payment, it’s coming up with the down payment. Especially since home values are still rising rapidly in many markets.
On average, renters across the largest metropolitan areas have to put about 30 percent of their total monthly income towards rent. So saving up for a 20 percent down payment is a real financial challenge. Even those who are trying to save for a federally assisted mortgage, which only requires 10 percent down, are finding it increasingly difficult.
This is leading most first timers, especially Millennials, to turn towards friends and family for financial help in order to enter the housing market. Last year, over 13 percent of home purchases required a gift or loan from a family or friend. Those numbers are predicted to rise to 14 or 15 percent by the end of the year.
However, choosing to rent provides little to no financial relief since rents are rising faster than home prices. Rental affordability jumped in 28 of the 35 largest metro areas last year, while mortgage affordability dropped in only 18 areas. In fact, rental affordability is worse than historical averages in 34 of the largest 35 metro areas, with Pittsburgh being the only current market where residents pay less than they have historically.
As an example, let’s break down the numbers on one of the hottest markets in the country, Denver, CO. Residents of the Denver metro area need to plan to spend about 21 percent of their total income on a mortgage. To cover rent, they’d need to spend 34 percent of their income.
The numbers are better on average across the U.S. Homeowners only have to plan to spend 15 percent of their income on mortgage. Rent costs are double that at 30 percent of income. But to qualify for a mortgage with the industry standard 20 percent down, buyers have to save $62,760 on a median-valued Denver home of $313,800.
For another example, let’s look at the Boston and Miami markets where only 22 and 20 percent, respectively, of monthly income is required to make a median monthly mortgage. Comparatively, renting is extremely expensive in these cities. In Boston, 35 percent of median income would go to paying median rent. In Miami renting is more than double the cost of owning at 44 percent. But to purchase a home in Boston, where homes are more expensive on average, a 20 percent down payment is over thirty percent higher at $76,220 compared to $44,680 for Miami buyers.
Certainly there are easier housing markets to enter than the aforementioned Los Angeles, Denver, Boston and Miami, all relative hotbeds of real estate. To break into the housing market of an average American city like Cleveland you’d only need $25,000 for a 20 percent down payment and for a loan requiring 10 percent down. Those types of federally assisted loans only requiring 10 percent down are also much easier to maintain in cities like Cleveland where median home prices are low. Cleveland homeowners only have to plan to spend 11 percent of their monthly income on a median mortgage. Renting is again substantially more expensive in a city like Cleveland, where an average renter would need to plan for upwards of 27 percent of their monthly income to meet median rents.
“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. “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. 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.”
If you’re interested in buying or selling a home anywhere in the greater Los Angeles area, contact us now at 323-829-8811 or email Susan Andrews at susan@luxurylahomes.com.
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