Janet Yellen thinks the economy is doing so well that next week she may raise interest rates for the first time in nine years. But many of America’s renters would probably beg to differ. Twenty-five percent of Americans spend more than 50% of their take home pay on rent. This amounts to 11.4 million people who are simply working to pay their landlord’s mortgage. With less than 50% of their take home available, many of these rent burdened folks have little to contribute toward an emergency fund or retirement account.
What’s more frightening is that over half of all renters are over the age of 40! The number of Americans now renting is at a 30 year high while the homeownership rate currently sits at a 48 year low. Many of these renters are unemployed or underemployed with insurmountable credit card, student loan and vehicle loan debt. It’s now clear to everyone that the National Association of Realtors dream of homeownership for all Americans is dead. Well, at least temporarily.
The sustainability of this system is as likely as Bernie Madoff’s investment fraud. Eventually, market forces will reveal that home prices are too high for real American incomes. In many markets, home prices will need to fall by 40-50% to reasonably turn renters into homeowners again, and I can prove it. Currently, the median priced American home is around $280,00, but the median income is only about $55,000. This means that a typical house is about 5 times a typical income, which is 2-3 times greater for you than it was for your grandparents (1.5-2 times income).
Let’s say that you are lucky enough to have the $56,000 (20%) down payment for a $280,000 house. Your monthly mortgage payment will be approximatley $1,400. You earn $2,300 a pay day 24 times a year, but it’s only about $1,700 after Uncle Sam steals his “fair share.” This typical American will need to spend over 40% of his take home pay on their mortgage, and that’s why Americans are renting. Most of them can’t even come up with $500 for an emergency, let alone a 20% down payment. And even if they could, 40% of their take home pay doesn’t leave room to make burdensome debt payments.
In order for our median income renter to be able to afford a home, he should only have to spend 25% or about $850 a month. To accomplish this at today’s rates (3.75%), the home would have to cost about $165,000 or 40% less than it does now. This will still be three times greater than the median income, but that will be a much needed improvement to what we have now. A $165,000 home price would have a down payment of $33,000, which is $23,000 lower (40% off) than it is now.
Renters will become owners again, but not until the U.S. experiences another inevitable correction like we did in 2008.