By Dr. Housing Bubble
The amount of money being spent on rent is at generational highs. High rents make it tougher for potential home buyers to save up for a down payment and this trend has impacted Millennials greatly. What is interesting looking at nationwide data is that while rents are consuming a larger share of income, those with mortgages are spending less. This is interesting because it doesn’t coincide with the big drop in the homeownership rate. But it makes sense. After all, investors are spending a smaller portion of their income covering the mortgage and those that did own, likely refinanced into record low rates. The trend is clear on a nationwide basis but not so much for markets like those in Los Angeles. Let us look at the latest figures.
Share of income spent on rent and mortgages
The math seems somewhat contradictory here: over the last decade we have gained 10 million renter households while netting out at close to zero for actual homeowners. There is massive machinery trying to push people to buy but many simply cannot especially with more than 7 million completed foreclosures over the last decade:
This is an interesting chart going back to 1985. You will notice that Americans that own a home with a mortgage are spending a smaller share of their income on the mortgage payment. But what you will also notice is that renters are spending a lot more of their income on rents.
Price-to-income ratios seem a bit high on a historical basis nationwide:
Overall these figures look relatively good on the home buying front given the typical U.S. home costs around $200,000 in most parts. But take a look at the most expensive rental market relative to incomes, Los Angeles:
While nationwide people that have a mortgage are spending less, in Los Angeles people are now spending more (nearly 40 percent of income on mortgage payments). And it is worse for renters: between 1985 and 2000 the average amount of income spent on rent was 36 percent for the L.A. metro area. Today it is at 48 percent (nearly half of income is spent on rent). And these are the people that are supposedly saving large amounts for crap shacks across the market?
While the price-to-income ratio seems a bit high nationwide, take a look at this chart for the L.A. metro area:
What is important to note is that starting in the late 1990s, the foundation was set to turn the housing market into a giant casino. Glass-Steagall was repealed and the game was on. Ironically the political cover was to increase the homeownership rate. This is the end result:
It worked for awhile until the foreclosure crisis hit and now people can’t afford homes at current prices. Sales volume is low and real estate is a marginal market so one or two sales can set the market price in an entire neighborhood.
Even Realtor.com did a little preemptive work here:
The markets in question are largely in California. But of course, this is no bubble because interest rates are low and some lemming savvy buyer made the 30-year commitment so all is well. Recessions will never happen again either. Memories are short and people live in a bubble. Just travel a bit around the country and you can see the widening gap that is becoming too loud to ignore, even in bubblicious markets.