High demand sends rent prices soaringDate posted: 8/19/14 08:30:00 AM
While some millennials want what their parents had - a large single-family home in the suburbs - many others want to live in a thriving urban area that offers nightlife and public transportation. But the problem with living in the latter is affordability. Most young adults don't have the financial means to purchase property in a major city, instead having to rent.
That's where some major stumbling blocks occur for millennial renters. Rent keeps getting more expensive, and certain markets with strong rental demand make it nearly impossible for a young person to save money toward a down payment on a home.
According to a report from Zillow, a few of the nation's largest markets can be especially hazardous for renters hoping to save some cash. The report stated a renter earning the median household income spends 31.5 percent on rent in Chicago. That figure increases to 40.5 percent for renters in New York and 49.7 percent for renters in Los Angeles. Meanwhile, renters making the median income in Dallas spend 27.7 percent of their monthly earnings toward rent, which makes saving for a home much more feasible.
A recent report from Reis, a real estate research firm, revealed the average cost of renting an apartment in the U.S. increased in 2014 for the fifth straight year. It's largely because of strong demand and short supply, according to Business Report.
David Berson, chief economist for Nationwide Insurance, told Zillow robust rental demand is impacting rent prices across the nation.
"Vacancy rates on rental units in the fourth quarter were down to 7 percent, the lowest in more than 20 years," Berson said.
Berson participated in Zillow's latest Home Price Expectations Survey, which polled more than 100 industry experts. He stated tight supply and high demand could proceed for several years in the rental market. He also said rents will continue to rise because many millennials have no choice but to rent because they're unable to afford a down payment for a home.
"If a larger share start to move toward [buying], the rent increase will not be quite as rapid," Berson said.
Predictions from the housing industry
While some people have asked the government to get involved to help slow climbing rents, Zillow reported more than 50 percent of survey respondents believe the housing market will gradually improve on its own.
"Uncle Sam can certainly do a lot, but I worry we've become too accustomed to automatically seeking federal assistance for housing issues big and small instead of trusting markets to correct themselves and without waiting to see the impact of decisions made at a local level," said Stan Humphries, chief economist at Zillow.
But it's not all good news. Results from Zillow's survey stated 51 percent of respondents believe rent affordability will not improve in the next two years.
The survey also revealed some interesting expectations from the polled panel. Many expect home values to increase 4.4 percent in 2015, increasing the median home value to more than $187,000. Additionally, the respondents stated U.S. home values will surpass their pre-recession peak by May 2017, reaching more than $196,000 at that time.
Dealing with rising rents
Apartment renter Mark Stevenson knows the perils of rising rent prices. He told Zillow rent for his one-bedroom apartment in California went up $351 to $1,830 per month.
"Here's my dilemma: Renew a 12-month rental lease complete with a 24 percent mugging, or buy a condo," Stevenson told Zillow. "I'm looking to buy now."
Renters hoping to make a home purchase should consider their credit scores and - if necessary - ways to improve their substandard scores, according to Trulia. The source stated prospective homebuyers should know as much as they can about their credit before meeting with a loan officer.
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