Cost Burden and the Trap of Long Term Renting

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Ask any typical, everyday Millennial about their views on home ownership, and you’ll probably hear one of a couple similar responses. A common answer is that they either haven’t put much thought into it, or see the prospect as something that is financially out of reach due to home prices and existing debts. They’ll likely be able to recognize the value of home ownership, but will express ambivalence toward the concept, and might not have plans of pursuing it; even if they’re in their late twenties or early thirties.

This trend of waning enthusiasm for home ownership isn’t unique for Millennials. Statistically, a strong majority of Gen Y’ers want to own homes, but don’t see it as a feasible option. In the aftermath of the greatest economic downturn since the Great Depression and the biggest housing collapse since 1890, the notion of owning a home is either a tough sell for the average American, or worse, a financial impossibility.

“It’s more of a new normal,” says Yale University professor and Nobel Laureate Robert J. Shille, “This is an anxious time.”

The truth is, despite the fact the overall economy has improved to pre-recession levels, home ownership has continued to fall. Down from it’s peak of nearly 70% in 2004, only 63.7 percent of American families currently own their home. Meanwhile, new rental households have skyrocketed, increasing by 770,000 since 2004.

Further inflaming the overall trend is a generation of young adults struggling to find adequate paying jobs who, unlike previous generations, are also saddled with debt and students loans. In an economy that remains tepid, more and more young adults are putting off starting families of their own.

Ongoing housing market volatility, an overall distrust of home ownership after the burst of the bubble, and financial hardships have set the tone. Unfortunately, the rise of the renter is an economic trap that only burdens households in the long term.

With more tenants renting homes and apartments at levels not seen since the 1980s, a higher demand and less available units have resulted in pricey rental rates that are only getting higher. In fact, though unemployment is down and markets have improved, the cost of rent has steadily risen faster than inflation. In the past year alone, rent prices have gone up 3.2%

As a result, renters across the nation are struggling more and more to get by. The percentage of renters who are cost burdened—that is, those who spend 30% of their income or more on rent—is at an all time high. As of 2013, half of all renters were struggling with cost burden. What’s worse, for the first time, a growing number of families with moderate incomes (between $30,000 and $75,000) are also slipping into cost burden.

Home ownership is the smart solution for new families seeking to invest in themselves rather than wasting money on endless high rent, but getting into a starter house proves elusive for the average family who can easily get trapped in rental properties.

Families like the McDowells, who were recently profiled by the New York Times, are the perfect example. Johnnie McDowell pulls in nearly $100K a year, but with student loans to worry about, car payments, and family expenses with two kids including $800 a month on preschool tuition, his family has been stuck in a three bedroom duplex. Add in a shaky credit history and debt, and the McDowells have been unable to find the financing to get into a home where they can invest in their own future rather than their landlord’s.

Federal programs have attempted to address this issue and incentivize banks and creditors to provide less stringent mortgages and loan rates, but they have done little to put a dent in the trend. In response, rent to own properties have become an increasingly popular option for families and individuals with limited incomes and less than perfect credit histories who are looking to break into the housing market.

Though home ownership may seem out of reach for many, one need only look to the figures to see that renting isn’t an economically viable alternative. Any pursuit of a sensible program that leads to home ownership is therefore clearly preferable. Purchasing a home may seem like the more daunting task, but it’s the only way to truly escape the financial trap of long term rental.