Is the Dream of Homeownership Dead? Demand for Rentals Continues to Grow

Is the Dream of Homeownership Dead? Demand for Rentals Continues to Grow

While much has changed since the bubble burst a few years ago, one trend has continued to exist throughout the real estate market – an increased demand for rentals. Though many experts once expected this trend to die down over the years, the demand for renting has in fact continued to increase, despite lower prices and declining mortgage rates. Now, many RE professionals are left asking the question, “Is the dream of homeownership dead?”

According to a recent study from the NYU Furman Center and Capital One, nine of America’s eleven largest cities are now populated by a majority of renters – up from just five cities in 2006. As you might have expected, both Los Angeles and San Francisco fall into this group.

In addition, nine of the eleven cities tracked also saw double-digit growth in the number of renters between 2006 and 2013, with five cities exceeding 20%. San Francisco saw a growth of 22% during this time span, while Los Angeles saw a more modest 11% increase.

It’s no surprise that with demand for rentals going up, prices are increasing too, but in many markets incomes are lagging far behind. In Los Angeles, the gross median rent increased by 11% while the gross median income dropped by 4%. Naturally, these changes have led to severally rent burdened tenants, some of whom face rent and utility costs equal to half of their income or more.

In Los Angeles and San Francisco, over 38% and 26% of moderate-income renters were burdened by rent respectively. Similarly, 28% of moderate-income renters could afford less than one third of the recently available units across Los Angeles, with 25% of renters in the same position in San Francisco.

“As the number of renters grow, if the supply of rental housing does not keep up—as it has not in most of these cities—then vacancy rates will fall, rents will rise, and more renters will struggle with the costs of housing,” said Ingrid Gould Ellen, the Furman Center’s faculty director.

But if renters are having trouble affording rent, how can they afford to buy a home?

“For many people, the biggest obstacle to buying is saving enough for a down payment, which is more difficult if you’re paying a lot of rent,” said Trulia’s chief economist Jed Kolko.

Do you think demand for rentals will continue to grow across California? Has the American dream of homeownership been cast aside? We’d love to hear your thoughts.

  • RE_Insider

    From one of our readers:
    Property here in Orange County, Southern California continues to be hot…..Cash buyers abound and frequently knock regular buyers out of the box. With cash buyers, no appraisal is necessary and the only limitation on what they spend is the amount in their pocketbook. It is my opinion that this is causing a bubble in our area. Prices are rising almost astronomically. They are paying top dollar for fixers that have sat on the market overpriced for awhile. Many buyers have become demoralized by their inability to compete and they have withdrawn from the market place.

    Can the cash buyers ever be depleted? That’s a good question. The banks are not offering any real interest on certificates of deposit or any other type of cash savings. So, for example, if you have $500,000.00 in a bank account, your return on investment is virtually nothing and to receive virtually nothing, your money is tied up. If you buy a $500,000.00 house, rents for the average $500,000.00 house are in the neighborhood of $2500.00!!!! The return on investment is amazing. Once you have a lease, a rental history, a P & L etc, you can pull a substantial amount of money back out of the property by refinancing at today’s excellent rates and do it again with a townhome that you pay $300,000.00 for and receive rents of $1800-2000 so you can have income of $4500.00 per month on your money and you are sheltering your money by depreciating your property. In the bank, you receive virtually nothing and its taxable. You can write off every dime of your improvements and eventually do a 1031 tax deferred exchange into units.

    So the question was, why are rentals so hot? They are hot here because buyers cannot compete with the glut of cash buyers and end up renting.

  • Belisarius

    In addition to the cash buyers, little recognition has been given to the fact that the last crash wiped out Americans’ savings. The Baby Boomers, who many economic forecasters have relied upon for greater market participation as they reach retirement age, have lost a great deal of their saved investment capital. When you combine this with the fact that labor participation is still abysmal (no matter how much government economists try to obscure it with snake oil statistics), you have a recipe for a stagnate market.

    You would see a modest shift from renting to buying if the cash investors were gone, but it would not be as large or sustained as many of us are hoping.