By one measure, renters in most of the nation's metro areas could afford to own a home. Not just the mortgage, but the suite of financial responsibilities involved with homeownership, from property taxes to home insurance. There's a host of reasons why more young renters aren't first-time home-buyers right now, but the ones that are cited the most—stay-at-home Millennials, crushing student debt loads—may not be the best explanations.
A new interactive map from the Harvard Joint Center for Housing Studies reveals that in many metro areas across the U.S., more than 50 percent of renters could afford to own a home. To create the map, researchers used data from a variety of sources to calculate both the homeownership costs and renter incomes in 85 of the nation's 100 largest metro areas.
The lightest-colored regions on the map indicate metro areas where more than 50 percent of renters could afford the monthly payments for a home reflecting the median price for the market. In six metro areas—centered around San Francisco, Los Angeles, and New York, and represented by the darkest-colored regions on the map—less than 30 percent of young renters (aged 25-34 for this analysis) can afford home ownership.
The Chicago metro area, for example, enjoys a homeownership rate of 65.1 percent. Some 38.3 percent of residents aged 25–34 are homeowners. Yet nearly half the renters in the same age cohort (46.9 percent) can afford to own homes, given a median home value of $189,200 and monthly costs of about $1,300.
The analysis requires a lot of assumptions, starting with a 43 percent debt-to-income threshold for determining the affordability of a mortgage for a renter household (a ratio pegged to the Qualified Mortgage rule that went into effect in January). The researchers also assumed 30-year mortgage interest rates and a 5 percent down payment, among other financial baselines. (Toggling that down-payment figure from 5 percent to 20 percent doesn't substantially change the results, by the way, since monthly payments would go down, though the implications would be more dramatic for a median home price of $773,375 than one of $83,775.)
The full methodology is here. One more of the researchers' assumptions bears teasing out, and that's non-housing debt. Student debt accounts for $1.2 trillion in the U.S., more than any other kind of debt except mortgage debt. To account for young renters' student-loan debt (and other kinds of debt, including credit-card debt), JCHS researchers applied a conservative debt-to-income ratio of 8 percent, drawing from statistics provided by the Federal Reserve's Survey of Consumer Finances. That works out to about $340 per month on average for car payments, credit-card bills, and student loan payments.
Given the fact that plenty of young renters with bills wouldn't be crushed under a mortgage, most metro areas would expect to see more of them buying homes. Yet in all but the most heated metro area real-estate markets, where renters simply don't have the incomes to buy, young renters don't appear to be transitioning into homeownership at the rate they could be. Either renters are opting out of the American dream, or it remains out of reach for reasons beyond affordability.
One thing that could be putting homeownership out of reach for young renters is a credit market that's still too tight, especially for graduates and young professionals starting their careers with established debt. As the Brookings Institution explained in a report on the consequences of student debt earlier this year, the gulf in credit-risk scores between borrowers with student debt and those without it is vast.
Another factor muddying the water for would-be homeowners: competition from corporations buying up houses. According to RealtyTrac, in the first quarter of this year, institutional investors made 5.6 percent of all U.S. residential home sales, down a little from the roughly 7 percent they accounted for throughout 2013. Institutional investors—"entities that have purchased at least 10 properties in a calendar year"—include the Blackstone Group, the private equity firm buying up leftover housing stock in suburbs across the country and renting them out.
Tight credit and big buyers dovetail neatly with all-cash purchases, which made for a stunning 42.7 percent of all home sales in the first quarter of 2014. That's more than double what all-cash buys meant to the market at the same time the year before. According to the RealtyTrac report, all-cash buys make up more than half of home purchases in diverse markets, including New York, Detroit, Memphis, Atlanta, and Las Vegas. (RealtyTrac hasn't released the figures for Q2 yet.)
Assuming a young renter has the income to buy a home in her market, she might not have access to the credit to make the deal, and even if she does, how can her credit compete with investor cash? The gulf between would-be first-time homeowners and second- or third-time homeowners—or corporate homeowners—is larger than a monthly mortgage payment.