Home Buyers finding it hard to save for a Down Payment when Rent increases outpace Income Growth

Steve Khan's picture
Saving to buy a home

With the Spring home buying season here many families have been prepping their finances all winter with the hope of buying a home this spring. For many that dream will become a reality but for too many other families the goal of homeownership will continue to remain out of reach. One of the biggest problems that potential homebuyers have is coming up with the required home purchase down payment.

According to the Zillow Rent Index, the 35 major cities tracked in the index showed an increase in rents of 3.3% over the past 12 months through January, 2015. While that may not seem too steep on the surface it is a big deal to the renters in these units whose incomes are not rising faster than the rental increases and in most cases income growth is not even keeping pace with rental increases.

For most Americans housing remains a household’s largest monthly expense and for renters sometimes that expense represents a larger portion of a family’s monthly income than it does for those who already own a home. Financial advisors like to see a family spending 25% of their monthly income on housing. On average the Zillow Rent Index discovered that renters are spending closer to 30% or more on average of their monthly incomes on rent and that percentage number is rising as rents continue to go up.

“Since 2000, rents have grown roughly twice as fast as wages” according to Stan Humphries who is Zillow’s Chief Economist. Mr. Humphries goes on to say that many renters are our nation’s future homeowners and “rising and increasingly unaffordable rents make it difficult to save for a down payment on a home”, he said.

According to the Zillow Rent Index median rental costs remain highest in cities in New York and California which is no surprise to many. And the pace and amount of rental increases is also highest in California with San Francisco and San Jose leading the way with 14.9% and 13.4% increases respectively. Surprisingly, the index had two cities on the list for highest percentage increase in rents that one might not expect. Denver showed rents increasing 10.2% while Kansas City showed rents increasing 8.5% over the past 12 months through January.

With renters paying such a high percentage of their income to landlords many families will remain in the “financially fragile” category until either rents stabilize or wage growth keeps up with rising rents. Americans are known historically to save some of the smallest percentages of their monthly incomes of any developed nation in the world. Some of that is cultural in that Americans have been known to “spend first and save later” and retirement will take care of itself. But that philosophy is trapping families in apartments long term when many should be building wealth with a forced savings account that homeownership creates.

What are some ways that American can make sacrifices to allow them to save more money?

* For younger renters who may not yet have gotten married or started a family, take on an apartment with roommates rather than renting a place on your own. Put the savings in a “home down payment” account and in one to two years you should have enough saved towards a down payment.

* For families, consider moving to a less expensive rental unit for a year or two to save more money. For those in a home, consider a less expensive apartment. For those in a fancy luxury apartment try going with more modest digs in order to save for a home.

* We also recommend folks buy a less expensive used car and forgo the new car monthly payment. Don’t let a $400 per month new car monthly payment prevent you from owning a home.

For those willing to make adjustments in their lifestyle there are ways to make small, but meaningful changes to one’s life that will yield some pretty substantial results in the long term.

This article is written by Stephen Khan. Stephen is a mortgage loan officer based in the Phoenix, Arizona area and in addition to his loan officer duties he enjoys writing about mortgage related topics that help home buyers better prepare themselves to buy a home. For more information on mortgage programs and the entire loan process you can visit Stephens’s home mortgage website for more information or to learn how to contact Stephen directly.

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