According to recent data from Zillow, buying a typical home in the U.S. is much more affordable than renting, especially compared to historical standards. In fact, the data shows that the average renter who signs a lease today can expect to contribute nearly twice the percentage of his or her income to paying the rent than the average homebuyer must pay toward a mortgage.
Still, despite the high cost of renting, more people (especially the younger generation) are choosing to rent their homes. Why aren't they buying, like their parents and grandparents did?
The data tells an expensive story
According to Zillow's July Real Estate Market Report, U.S. homebuyers can expect to pay just 15.3% of their income toward their mortgage payment on a typical home. This is down significantly from the 22.1% of a homeowner's income that was needed to pay the mortgage just five years ago.
On the other hand, rent has been rising steadily for about a decade, and will now on average eat nearly 30% of a resident's income.
Part of this is because renters earn lower salaries, on average, than their homeowning counterparts: The average homeowner makes $65,514, while the average renter makes just $31,888. However, the fact remains that renting a home continues to get more expensive. According to the latest data, the average rent has risen by 3.9% in the past year alone.
Income doesn't tell the whole story of why more people are choosing not to become homeowners. After all, in many areas of the U.S., you can purchase a nice condo for a five-figure price tag. So why aren't more people buying?
It's not about affordability, but about lifestyle
Especially for the millennial generation (ages 22 to about 32), opting out of homeownership has more to do with lifestyle choices than money.
Some people have high student loans, and are playing catch up, having graduated from college into one of the worst job markets in history. Some saw their parents go underwater on mortgages and even get foreclosed on, and therefore perceive buying a house as a lot of unnecessary risk.
Many younger Americans are also waiting longer to get married and have children, and don't really need a home of their own.
And some don't want to be tied down to one location for a long period of time. Younger workers are "job-hopping" more than any generation before them, and the hassle and expense of selling a home could be enough to make the expense of renting seem worthwhile.
Whatever the reason, the increasing cost of rent relative to the expense of ownership doesn't necessarily make for a "healthy" housing market.
What could it mean for real estate
The basics of supply and demand say that when more people want something, it becomes more expensive, and this is exactly what we're seeing in many rental markets. More people want the flexibility and simplicity of living in an apartment or house that isn't theirs, and are willing to pay for the privilege.
On the other hand, supply and demand also says that a lack of demand can push prices down. And while U.S. home prices have definitely leveled out recently, we're yet to see any significant declines. A big reason for this is that investors have made up a good percentage of home sales, hoping to cash in on the combination of low mortgage rates and high rental demand.
However, if investors begin to leave the market for whatever reason (mortgage rates rise or rental demand slows, for instance), home prices in the U.S. could deflate a little, after a few years of rapid gains.
While there is no reason to think millennials and other Americans will suddenly begin to buy more homes, if the current trend continues, at some point rent will become expensive enough to make homeownership seem like the better option.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Zillow. The Motley Fool owns shares of Zillow. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.