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A Local Look: Affordability for Renters, Buyers

Nov 23, 2015  , , , ,

By Satinder Haer, Zillow

With the real estate market growing faster than incomes since the recession, affordability is an issue across the country. Is it more affordable to rent or own? At any time, the answer depends on a number of complex, shifting factors: local real estate market conditions, mortgage interest rates and your personal financial situation, among others. However, the data continues to suggest that on a monthly basis, buying remains a better bargain than renting.

Renting is less affordable than ever before while purchase affordability is at an all-time high. Historical data show from 1985 to 2000, renters could expect to spend about 24.5 percent of their monthly income on rent. In the third quarter of 2015, renters spend roughly 30.2 percent of their monthly income on rent—the highest percentage on record. Homeowners on the other hand, are faring even better than they were before 2000. Historically, homeowners spent approximately 21.3 percent of their monthly income on their mortgage payments. Comparatively, Q3 2015 buyers can expect to put just 15 percent of their monthly income toward a mortgage. Renters are forced to spend more of their paycheck on rent than they did before the real estate bubble and bust while homeowners spend less.

California’s real estate market diverges from the national norms. The percentage of income required to afford rent in popular California markets is significantly higher than the national average. In extremely high demand markets such as Los Angeles and San Francisco, renters can expect to spend 48.8 and 47 percent of their monthly income on rent, respectively. San Diego and San Jose rental prices are comparatively more affordable, but still hover above 40 percent. Therefore renters in San Diego or San Jose are spending an average of 10 percentage points more of their monthly income to afford rent than their counterparts in different states.

Even purchasing a home is less affordable in California than in any other state. Only five metros across the nation experienced decreasing mortgage affordability after the Great Recession and four of them are in California (the fifth is Denver, CO). Buyers who want to own in San Jose, San Francisco, Los Angeles or San Diego can expect to put more of their monthly income toward a mortgage than they would have historically. However, buyers still spend a smaller portion of their paychecks on housing than renters in these markets.

Overall, the data show you’ll put less of your monthly income toward a mortgage than a rental payment. If you purchase in Los Angeles, San Francisco, San Diego or San Jose you save more each month than renting. Outside these four hotspots, purchasing a home is more affordable than it has historically ever been. If your goal is to put less of your monthly income toward housing and you have the savings for a down payment, buying may be the way to go.

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