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Tuesday, February 19 , 2019, 2:18 am | Fair 42º


Craig Allen: Escalating Rents Make It Tough on Renters Who Can’t Afford to Buy

Home prices have fallen dramatically, but one side effect is the upward pressure on rental rates

Since the recession began in late 2008, the growth of renter households has consistently outpaced the growth of owner households. The home ownership rate dropped to 66 percent of all households in the fourth quarter of 2011 —the lowest rate in more than a decade. As homeowners have lost their homes, they have entered the rental market, swelling the total number of renters, and driving rental rates higher. Although some of the homes lost have entered the rental inventory, the number of new renters has far exceeded the availability of rentals. More demand and limited supply has driven rental rates to levels that make it difficult for many to afford a place to live.

According to the Census Bureau, about 34 percent of California’s population rents, while the figure is approximately 60 percent in Santa Barbara and 64 percent in Santa Monica. The median rent asked in Santa Barbara is $2,053, which is about 53 percent higher than the median rent in California as a whole. The median rent in Santa Monica is $2,035, about 51 percent higher than the state as a whole.

A good rule of thumb is that renters should spend no more than 30 percent of their net earnings on their rent expense. So, for every $500 in rent, the renter should earn at least $1,667 after tax. According to a recent report by the National Low Income Housing Coalition, only renters in 37 of the nation’s 582 metropolitan regions considered in the report meet this goal. In fact, according to the report, in most parts of the country, rental prices vastly exceed the 30 percent threshold of the average renter’s wages.

Contributing to the pain for renters in that fact that incomes are down from pre-recession levels, assuming the renter is not one of the 12.7 million Americans without a job. (This is the official number, which accounts for the current 8.2 percent unemployment rate. The reality is that many more are unemployed, but have fallen off of the unemployment rolls, since they have exhausted their unemployment benefits and therefore are no longer counted [although they are still very much unemployed]. The real unemployment rate is probably in the 15 percent range, or close to 23 million people.)

According to the California Association of Realtors, single-family median home prices in California peaked in May 2007 at $594,530. Since then, they have fallen to $266,660 (February 2012), or by an incredible 55 percent. Not to be outdone, in Santa Barbara County, prices have fallen from a peak of $878,124 in July 2007, to the current (February 2012) $345,000, or by an even more amazing 61 percent. In the Los Angeles area — which includes Los Angeles, Orange, Riverside, San Bernardino and Ventura counties — median home prices have fallen from a peak of $625,812 in September 2007, to the current (February 2012) $272,690, or by 56 percent.

One key challenge that I personally see locally is that property owners are in denial about the value of their property. Many still believe that their property may have fallen in value a bit, but have no idea that it has fallen by more than half from the peak. Even those who acknowledge the carnage still believe their property is special, and therefore should command a higher rent than the rest. Some are simply pricing rents based on what their mortgage payment is, rather than a competitive rental rate given the quality, square-footage, location, etc., of their property. In high-end markets like Santa Barbara, Beverly Hills, Brentwood, Carmel, San Jose, Santa Monica and the like, there are renters who can afford to pay the rents these property owners are asking, making it even tougher on those who can’t afford it.

Rent affordability reflects what the renter earns versus what rents are in the local market. In many high-end markets, the number of people earning less than 30 percent of the median household income has skyrocketed as a result of the long recession. In Orange County, the average rent is $1,652 per month. The average renter’s wage is $18.04 per hour, which is one of the highest in the country, and the median annual income for renters is $49,986 (also one of the highest in the country), while the wage required to rent a typical two-bedroom apartment is $31.77 per hour.

A worker earning minimum wage of $8 per hour would need to work 159 work hours per week to rent a two-bedroom apartment at the fair-market rate in Orange County. According to the Housing and Urban Development Department, the average renter in this market would need to earn 70 percent more than they currently earn, to meet the 30 percent of income rule. At the median income for renters in Orange County of $49,986, or about $3,000 after taxes, the average renter would spend about 55 percent of his or her take-home pay on rent. To meet the 30 percent rule of thumb, this renter would need to earn about $5,500 after tax each month, or about 83 percent more.

With population growth in California averaging about 340,000 annually over the past decade, and population growth expected to continue into the future, and the shortage of housing that California has been experiencing for many years only increasing due to a lack of new construction resulting from the real estate bust, renters will have no relief for the foreseeable future. However, with the large number of foreclosed properties in the pipeline, and banks ramping up their foreclosure and property resale operations, we could see some additional inventory enter the market over the coming few years, which could put a little pressure on rental rates.

One bright spot is the fact that, for the first time in a long time, rental rates and mortgage payments are not too far apart. If banks loosen their lending requirements somewhat, which I believe is coming soon, renters may have a strong opportunity to become homeowners with a chance to build some equity.

Craig Allen, CFA, CFP, CIMA, is president of Montecito Private Asset Management LLC and founder of Dump Your Debt. He has been managing assets for foundations, corporations and high-net worth individuals for more than 20 years and is a Chartered Financial Analyst (CFA charter holder), a Certified Financial Planner (CFP) and holds the Certified Investment Management Analyst (CIMA) certification. He blogs at Finance With Craig Allen and can be contacted at .(JavaScript must be enabled to view this email address) or 805.898.1400. Click here for previous Craig Allen columns. Follow Craig on Twitter: @MPAMCraig.

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