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posted on 16 June 2015

Raise Homeownership By Lowering Rents

by Zillow

Renting is traditionally a stepping stone to homeownership. And an affordable rental market typically coincides with higher homeownership rates. More affordable rents allow households to save money for a down payment on a home and other home-buying expenses. On the flip side, less affordable rents in some markets often go hand-in-hand with lower homeownership rates, as more money going into landlords' pockets each month means less going into tenants' savings accounts.

As the rental affordability crisis spreads in the face of stagnant wages and rapidly rising rents, and as buying a home increasingly looks like a bargain compared to renting, Zillow analyzed 106 metropolitan areas to determine how rent and mortgage affordability impacted homeownership.[i]

Large California metros, with Los Angeles leading the way, typically feature both the highest rent burdens and lowest homeownership rates (figure 1).

Of course, areas with more affordable mortgages - areas where the typical monthly mortgage payment consumes a smaller portion of a household's income - also tend to have higher homeownership rates (figure 2). And areas with more unaffordable mortgages have lower homeownership rates.

But even in areas where mortgage affordability is poor, buying is almost always more affordable than renting. The only metro analyzed in which mortgage affordability is worse than rental affordability is in San Jose. Knowing this, why aren't highly-burdened renters in most areas opting to become slightly less-burdened homeowners? High rents that make saving more difficult, low for-sale inventory (especially of less expensive starter homes likely preferred by first-time buyers and current renters) and tight (but improving) mortgage credit are all likely to blame to some degree.

Once again, Los Angeles takes dubious top-spot honors among all metros surveyed, boasting both the worst mortgage affordability and the lowest rate of homeownership. The rest of the large California metros all fall into a similar situation.

But there are areas where both rentals and homeownership are affordable, and where the homeownership rate is fairly robust, including Youngstown, Ohio, and Augusta, Georgia. The Pittsburgh, Pennsylvania, area is crushing it in pretty much every affordable housing way: Steel City home buyers should currently expect to spend just 11 percent of their income on a mortgage and 25 percent of their income on rent, both well below national averages. The Pittsburgh-area homeownership rate is currently 70 percent, well above the national average.

Metros like Los Angeles, San Francisco and San Diego are among the most unaffordable markets in the country, especially for low-income residents, so it is little surprise that homeownership is low. In Los Angeles, for example, low-income households looking to buy in LA should expect to spend 85 percent of their income on a mortgage - essentially putting homeownership out of reach.

Times are tough in California, especially, but also in dozens of other markets nationwide. And at least with regard to rental affordability, things aren't expected to get better any time soon.

[1] Homeownership rate calculated from 2013 American Community Survey. IPUMS-USA, University of Minnesota,

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