Affordability Falling as Permits Lag Growth

The old maxim that a household rents only until it can afford to buy a home is apparently being stood on its head in a lot of housing markets.  A study published on Friday by Zillow says that "rental affordability is as bad as it's ever been."  Nationally, in fact, they found it is consuming nearly twice as much of a family's monthly income as would homeownership and in many markets that ratio is even higher.

In the fourth quarter of 2014 Zillow found that, in the U.S. as a whole, households are spending 30.1 percent of their income for a rental while, with a Zillow Home Value Index (ZHVI) of $178,700 and historically low interest rates they would spend 15.3 percent on an owned home.  According to Zillow's February Real Estate Market Reports, the ZHVI above reflects a 4.9 percent year-over-year increase while "Zillow rents" rose 3.4 percent nationally to $1,355.* 

Compounding the problem is the slow rate of income growth.   According to Zillow, since 2000, rents have grown at roughly twice the pace of incomes. Partially as a result, The Census Bureau says the percentage of Americans citing "cheaper housing" as a reason they moved to a different home has almost doubled, from 5.6 percent then to a current 9.6 percent.

But underlying the disconnect between the cost to rent and cost to buy is the issue of basic  affordability and Zillow found that the least affordable markets for both renters and homeowners are those where new housing permits have not kept up with population growth.  They looked at permits for housing units issued in major markets in 2012 and 2013 for every new resident who arrived in those cities in 2013 and 2014.

In traditionally pricey Los Angeles and San Francisco the ZHVIs are $533,700 and $751,800 respectively.  In Los Angeles rents consume 48.2 percent of income and house payments 40.1 percent; in San Francisco 44.0 and 39.2.   Each has lagged far behind their respective population increases in terms of building authorizations; Los Angeles with 187 permits per 1,000 new residents and San Francisco with 193. 

Zillow said the short supply is no secret to policy-makers. The mayor of San Francisco has pledged to add 30,000 housing units by 2020, and a Boston city report (permits there were at a rate of 299/1000) made a similar recommendation to meet demand with 53,000 new housing units by 2030.

Only three cities were cited in the survey as more than keeping pace with growth, issuing permits in excess of 1000.  The three, Detroit (1,813), St. Louis, Missouri (1,036), and Cleveland (1,311), had remarkably similar housing costs as a percentage of income ranging from 10 to 10.9 percent for house payments and 24.4 percent to 27.4 percent for rents.  A fourth city, Pittsburg, was said to have over 42,000 permits per 1000 new residents.  We assumed this to be an error although the city's housing costs were very much in line with the other three.

"As the economy continues to improve, more Americans are slowly moving off of their buddies' couches and out of their parents' basements into homes of their own, first likely as renters and then eventually as homebuyers," said Zillow Chief Economist Dr. Stan Humphries. "Unfortunately, the supply of affordable homes, especially affordable rentals, is insufficient in many areas to meet this growing demand. As a result, the competition for those homes that are available can often be fierce, driving up prices and contributing to worsening affordability. More construction will help ease the crunch, and getting a mortgage is also getting easier, which will help more current renters transition to homeownership and further ease rental inventory shortages. But these fixes won't happen overnight."

*There is no context provided as to whether Zillow Rents or the Zillow Home Value Index should be interpreted as analogous to mean or median figures.