Rent VS. Buy: Are Real Estate Markets Shifting in Favor of Renting?

Posted by Chris Clothier on Mon, Jun 9, 2014

rentvsbuy metroReal estate investing has been a very popular topic over the last few years.  Real estate investors with rental properties have been in a good place during the last few years. The surge of homes in foreclosure meant that properties were ripe for the taking - and at record low prices. As the housing market recovers, however, the number of homes available is dwindling and some investors are choosing to leave the business...it just isn’t as easy anymore.

That, however, is what the 'real' real estate investors have been waiting for.  Because it is no longer easy is not a good reason to leave the real estate investing industry for serious investors.

Renting isn’t going anywhere.

In fact, while the rent vs. buy debate has been historically in favor of homeownership, we’re only continuing to see renting emerge as a more attractive and viable option.  Ownership rates in the U.S. have historically been between 64% and 66% and only began to push higher in the lates 1990's and early 2000's when there was pressure to ease lending standards.  The U.S. home ownership rates went as high as 69.1% in 2005 (U.S. Census).  Today, the rate is sitting at 64.8%, which is nearly a quarter percentage point lower than same time last year.  That rate could continue to fall over the next year as houses come out of a vacant status and into a rental status rather than an owner-occupied status.

The economic factors behind the shift have a larger scope than simply the state of the real estate market.

Within the market, high home prices discourage people from buying with the expectation that the market will soon return to more normal levels. Renters don’t have to worry about losing value on their homes.

According to the New York Times, in fact, buying homes in some of the hottest metropolitan areas in the country, including New York City, the San Francisco Bay Area and Los Angeles, buying a home can be financially out of reach for many people. Since 2011, for instance, home prices in San Francisco have increased 33%, 30% in Miami and 24% in Los Angeles.

Though these areas have rental prices at record highs and were once not a feasible option for those looking to stay in town more than a few years, outrageous home prices have people second-guessing. In areas like Miami, Boston and Washington, renting is more clearly overtaking buying since buying just isn’t a bargain.

A lack of inventory in large cities, combined with residents with deep pockets, mean prices continue to go up, driving out the middle class and many younger buyers.  The best options for these residents is to enter the rental pool and look for that dream house at a better rate than they can pay buying outright.

While in other parts of the country, buying and renting are still close in competition, in the Northeast and a large portion of California, renting is beating out buying in terms of cost.

An Advantage in Rental Housing

Though one can’t guarantee that these cost increases will affect other parts of the country (for example, Texas often has a stronger local economy and more development, leading to a better inventory and avoiding the massive spike in home prices), in rent vs. buy, renting is gaining an advantage.

For the real estate investor, that’s good news. People will continue to rent around the country, whether through preference or necessity.

How do you see home prices affecting the number of people renting? Share with us in the comments.

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image credit: Chris Isherwood

Topics: real estate investing, real estate investors, rent vs. buy, U.S. Census