Valley renters are increasingly finding themselves caught between rapidly rising rents and soaring home prices that make buying a house next to impossible.
Starter-home prices are rising seven times faster than a typical renter’s income, making saving for a down payment even harder, according to a new analysis by Zillow.
The online real estate marketplace earlier this month said its analysis shows first-time buyers need a year longer to save enough for a 20 percent down payment than they did in 2017 and must put away an additional $369 per month in the coming year just to keep up with the forecasted growth in home values.
But a report from Arizona Regional Multiple Listing Service on July 19 carried depressing news for any buyer, let alone first-timers: Year-over-year sale prices in the Phoenix metro region rose a whopping 46.26 percent in June and the current average price of a home is $507,936.
Realtor.com last week reported,“High demand for a limited supply of rental housing has resulted in skyrocketing prices across the nation – and desperation from those seeking more affordable housing options.”
Zillow noted, “Monthly payments can remain affordable even with a smaller down payment, and flexible work options are providing new opportunities for many to buy a home in a less-expensive city.”
That likely doesn’t include the Phoenix metro area, where various reports indicate that both rents and house prices are skyrocketing.
The Cromford Report, one of the region’s premier analysts of the Valley housing market, said the median sales price for homes in June was $400,000 – up 24.2 percent from a year ago.
That median is higher than the nation-wide home median price of $363,000 that the National Association of Realtors announced last week.
Noting the market appears to be cooling as inventory steadily increases, Cromford doesn’t expect home prices to fall – or even weaken – cautioning, “You would be mistaken if you think most sellers are asking less for their homes.”
It’s not only home prices that are soaring for renters.
Nationally, Realtor.com reported, the median rent hit a new high of $1,575 in June, up 8.1 percent compared with last year.
Phoenix is among the 44 of the nation’s 50 largest cities that “posted new highs, squeezing renters even tighter,” Realtor.com said.
Looking at markets with the largest year-over-year price increases and median rents in June, it said Phoenix's median rent soared 20.9 percent to $1,590 – a higher median rent than the national figure.
“We are seeing an excessive amount of people showing up for rental properties and turning applications in, probably five times the amount it was a year ago,” one broker told Realtor.com.
“Similar to the shortage of homes for sale, the number of homes available to rent is historically low, driving prices up,” it said. “That’s hurting cash-strapped renters vying for places to live that fit in their budgets.”
The pandemic’s economic pressures “have not affected everyone equally,” said Danielle Hale, chief economist at Realtor.com. “There has been a lot of government support, so incomes remained steady for a lot of people, and for some Americans, incomes have risen.”
Realtor.com surmised the shrinking rental inventory may have been partly impacted by landlords “throwing in the towel” as restrictions like the eviction moratorium make it harder to manage properties and pay their own bills.
Phoenix is a good case in point. A memo to City Council last week shows that between March and this month, the city has shelled out $18.8 million in rental assistance to 2,492 households.
With only 43 percent of its rental assistance funds expended, the city now wants to “hire approximately 20 additional temporary employees with higher pay to attract more applicants and more highly qualified personnel,” the memo from the City Manager’s office states.
It also wants to “increase pay of existing temporary employees to encourage retention” and “add premium pay to staff providing services,” according to the memo.
“Across Arizona and the nation, a lot of protections “are still in place but are close to expiring,” Hale said. Renters who are ultimately evicted will need to find new housing going forward, making it harder to find a place to rent, he added.
Zillow based its analysis on a starter home price of $148,500.
“If an average renter household saves 10 percent of its income, it would take about six years and five months to save enough for a 20 percent down payment on today’s typical starter home worth about $148,500,” it said.
But Zillow also noted tat in reality, the typical starter home – the median home in the bottom third of home prices – is worth $270,560.
“Without the equity from a previous home sale, first-time home buyers face more challenges in coming up with a down payment,” said Zillow economic data analyst Nicole Bachaud, adding:
“In a housing market where prices are rising at record rates, especially when compared to renter incomes, the ever-increasing sum of a 20 percent down payment can feel out of reach.
“The good news is that buyers who want to take advantage of today’s low mortgage rates can do so without putting a full 20 percent down – most conventional mortgages allow as little as 3 percent to 5 percent. That lower upfront payment comes with higher monthly payments, but the opportunity to build equity can outweigh those extra costs for many.”
Zillow forecasts 14.9 percent appreciation over the next year, which would mean renters need to save an additional $369 per month just to keep up.
Renters in California face the biggest barriers to saving for down payments. San Francisco renters earn nearly twice as much money as the typical U.S. renter, yet home prices are so high that it would take 17 years and five months ― 11 years longer than the national average ― to save enough to put 20 percent down on a local starter home.
Pegging a starter home price of $270,560 in Phoenix, Zillow said it will take 10 years and six months to put away enough for a 20 percent down payment but only just under three years for a 5 percent down. The difference in a mortgage payment at those percentages would be $1,133 and $1,551, respectively, it said.
“A smaller down payment, of course, comes with tradeoffs on the monthly mortgage payment, such as the private mortgage insurance lenders often require borrowers to carry,” Zillow said. “Buyers may decide the benefits of homeownership and the chance to build equity sooner outweigh the additional housing cost burden each month.”
Zillow also reported that its analysis found people of color who rent have
even greater obstacles saving for a down payment.
“Because of differences in incomes and the lingering impacts of historical inequities, it is more difficult for Black and Latinx renters to come up with a down payment on their first home,” it said.
“It would take six years and one month for a white renter earning the median income, and four and a half years for an Asian American renter earning the median income to save for a 20 percent down payment on a starter home, compared with nine years and seven months for a Black renter, and seven years and eight months for a Latinx renter.”