How Rising Home Prices Are Affecting the Rental Market

From May 2012 to May 2013, the SP/Case-Shiller Home Price Index (which tracks property values) skyrocketed up more than 12%—the biggest year-over-year gain in housing prices since before the bubble burst. This is likely due to lower borrowing costs and the relatively small supply of homes on the market. As demand rises, so do prices. This has caused many Americans who would have purchased homes to rent, bringing rental vacancy rates to their lowest levels in a decade.

Renting particularly makes a lot of sense for today’s young, mobile earners. Many of them saw their parents’ homes drastically lose value in the current market, or even worse, saw their families get foreclosed on and have to compromise by moving into an apartment or shared living arrangement. Combine the expense, responsibility, lack of mobility and lack of liquidity of traditional mortgages, and it’s no surprise that younger workers in search of flexibility don’t associate renting with the same stigma as earlier generations.

In many analyses, it’s still cheaper to buy a home than it is to rent. What most of these analyses exclude, though, is the fact that you have to stay put longer in your home, to spread closing costs over more time. They also leave out that your home will typically appreciate more the longer you stay in it, creating the dichotomy of a non-liquid asset that appreciates only as it stagnates. In addition, when buying a home in order to save, that’s just one asset–renting lets individuals spread their assets out in a more diverse fashion.

Cheaper, however, doesn’t mean “more affordable.” As we reported last month, interest rates on 30-year mortgages are up to 4.8%, from 3.6% at the end of April, which has led to a 20% drop in refinances and a 3% drop in home purchases—affordability is still difficult to achieve. In addition, consider that according to NAR, 33% of home purchases in July 2013 were made with cash—a clear sign that investors are the ones buying.

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